Does Zee Entertainment Enterprises (NSE:ZEEL) Have A Healthy Balance Sheet?

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 Zee Entertainment Enterprises Limited (NSE:ZEEL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Zee Entertainment Enterprises

What Is Zee Entertainment Enterprises's Debt?

As you can see below, Zee Entertainment Enterprises had ₹4.17b of debt at September 2021, down from ₹7.54b a year prior. But on the other hand it also has ₹16.0b in cash, leading to a ₹11.9b net cash position.

How Strong Is Zee Entertainment Enterprises' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zee Entertainment Enterprises had liabilities of ₹24.8b due within 12 months and liabilities of ₹1.33b due beyond that. Offsetting these obligations, it had cash of ₹16.0b as well as receivables valued at ₹19.3b due within 12 months. So it actually has ₹9.24b more liquid assets than total liabilities.

This surplus suggests that Zee Entertainment Enterprises has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zee Entertainment Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Zee Entertainment Enterprises grew its EBIT by 97% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zee Entertainment Enterprises can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zee Entertainment Enterprises has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Zee Entertainment Enterprises reported free cash flow worth 18% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Zee Entertainment Enterprises has net cash of ₹11.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 97% year-on-year EBIT growth. So we don't think Zee Entertainment Enterprises's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Zee Entertainment Enterprises you should know about.

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.