Hindustan Media Ventures (NSE:HMVL) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hindustan Media Ventures Limited (NSE:HMVL) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hindustan Media Ventures

How Much Debt Does Hindustan Media Ventures Carry?

As you can see below, Hindustan Media Ventures had ₹598.2m of debt at March 2021, down from ₹1.17b a year prior. But it also has ₹3.47b in cash to offset that, meaning it has ₹2.88b net cash.

A Look At Hindustan Media Ventures' Liabilities

The latest balance sheet data shows that Hindustan Media Ventures had liabilities of ₹4.76b due within a year, and liabilities of ₹465.7m falling due after that. Offsetting these obligations, it had cash of ₹3.47b as well as receivables valued at ₹1.26b due within 12 months. So its liabilities total ₹488.9m more than the combination of its cash and short-term receivables.

Of course, Hindustan Media Ventures has a market capitalization of ₹5.86b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Hindustan Media Ventures also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Hindustan Media Ventures's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Hindustan Media Ventures had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₹5.6b. That's not what we would hope to see.

So How Risky Is Hindustan Media Ventures?

While Hindustan Media Ventures lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹356m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Hindustan Media Ventures (1 doesn't sit too well with us) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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