Is Raj Television Network (NSE:RAJTV) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Raj Television Network Limited (NSE:RAJTV) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Raj Television Network

What Is Raj Television Network's Net Debt?

As you can see below, Raj Television Network had ₹366.4m of debt at September 2020, down from ₹485.2m a year prior. On the flip side, it has ₹27.5m in cash leading to net debt of about ₹338.9m.

How Healthy Is Raj Television Network's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Raj Television Network had liabilities of ₹360.1m due within 12 months and liabilities of ₹253.1m due beyond that. On the other hand, it had cash of ₹27.5m and ₹597.2m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Raj Television Network's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹1.84b company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Raj Television Network 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.

In the last year Raj Television Network had a loss before interest and tax, and actually shrunk its revenue by 25%, to ₹542m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Raj Television Network's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹48m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Raj Television Network 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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