Here's Why New Delhi Television (NSE:NDTV) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, New Delhi Television Limited (NSE:NDTV) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for New Delhi Television

How Much Debt Does New Delhi Television Carry?

As you can see below, New Delhi Television had ₹596.1m of debt at March 2021, down from ₹1.11b a year prior. However, it also had ₹391.8m in cash, and so its net debt is ₹204.3m.

A Look At New Delhi Television's Liabilities

According to the last reported balance sheet, New Delhi Television had liabilities of ₹2.54b due within 12 months, and liabilities of ₹296.5m due beyond 12 months. Offsetting this, it had ₹391.8m in cash and ₹1.41b in receivables that were due within 12 months. So it has liabilities totalling ₹1.04b more than its cash and near-term receivables, combined.

Of course, New Delhi Television has a market capitalization of ₹5.21b, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.17 and interest cover of 4.9 times, it seems to us that New Delhi Television is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Notably, New Delhi Television's EBIT launched higher than Elon Musk, gaining a whopping 166% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since New Delhi Television will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, New Delhi Television's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

The good news is that New Delhi Television's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Looking at all the aforementioned factors together, it strikes us that New Delhi Television can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for New Delhi Television you should be aware of, and 1 of them is concerning.

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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