These 4 Measures Indicate That Sambhaav Media (NSE:SAMBHAAV) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Sambhaav Media Limited (NSE:SAMBHAAV) 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Sambhaav Media

What Is Sambhaav Media's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sambhaav Media had ₹132.1m of debt in March 2024, down from ₹189.2m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Sambhaav Media's Balance Sheet?

We can see from the most recent balance sheet that Sambhaav Media had liabilities of ₹98.1m falling due within a year, and liabilities of ₹73.3m due beyond that. On the other hand, it had cash of ₹1.84m and ₹225.0m worth of receivables due within a year. So it can boast ₹55.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Sambhaav Media could probably pay off its debt with ease, as its balance sheet is far from stretched.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Sambhaav Media's net debt to EBITDA ratio of about 2.3 suggests only moderate use of debt. And its commanding EBIT of 78.4 times its interest expense, implies the debt load is as light as a peacock feather. Notably, Sambhaav Media made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹31m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sambhaav Media'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Sambhaav Media actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Sambhaav Media's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Zooming out, Sambhaav Media seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Sambhaav Media (including 1 which shouldn't be ignored) .

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.