Is TV18 Broadcast (NSE:TV18BRDCST) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, TV18 Broadcast Limited (NSE:TV18BRDCST) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for TV18 Broadcast

What Is TV18 Broadcast's Debt?

The image below, which you can click on for greater detail, shows that TV18 Broadcast had debt of ₹14.9b at the end of September 2020, a reduction from ₹17.8b over a year. On the flip side, it has ₹3.67b in cash leading to net debt of about ₹11.2b.

How Healthy Is TV18 Broadcast's Balance Sheet?

The latest balance sheet data shows that TV18 Broadcast had liabilities of ₹32.3b due within a year, and liabilities of ₹2.00b falling due after that. On the other hand, it had cash of ₹3.67b and ₹18.9b worth of receivables due within a year. So its liabilities total ₹11.7b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since TV18 Broadcast has a market capitalization of ₹49.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

TV18 Broadcast's net debt of 1.8 times EBITDA suggests graceful use of debt. And the fact that its trailing twelve months of EBIT was 8.3 times its interest expenses harmonizes with that theme. Pleasingly, TV18 Broadcast is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 186% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TV18 Broadcast can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, TV18 Broadcast produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, TV18 Broadcast's impressive EBIT growth rate implies it has the upper hand on its debt. And we also thought its interest cover was a positive. Taking all this data into account, it seems to us that TV18 Broadcast takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. Over time, share prices tend to follow earnings per share, so if you're interested in TV18 Broadcast, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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