Here's Why Zee Entertainment Enterprises (NSE:ZEEL) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Zee Entertainment Enterprises Limited (NSE:ZEEL) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Zee Entertainment Enterprises

What Is Zee Entertainment Enterprises's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zee Entertainment Enterprises had ₹1.55b of debt, an increase on ₹61.7m, over one year. However, it does have ₹17.8b in cash offsetting this, leading to net cash of ₹16.3b.

How Healthy Is Zee Entertainment Enterprises' Balance Sheet?

We can see from the most recent balance sheet that Zee Entertainment Enterprises had liabilities of ₹18.5b falling due within a year, and liabilities of ₹4.15b due beyond that. Offsetting this, it had ₹17.8b in cash and ₹17.0b in receivables that were due within 12 months. So it can boast ₹12.2b 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 the other hand, Zee Entertainment Enterprises's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zee Entertainment Enterprises's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zee Entertainment Enterprises may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Zee Entertainment Enterprises reported free cash flow worth 15% 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 it is always sensible to investigate a company's debt, in this case Zee Entertainment Enterprises has ₹16.3b in net cash and a decent-looking balance sheet. So we don't have any problem with Zee Entertainment Enterprises's use of debt. 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. Be aware that Zee Entertainment Enterprises is showing 1 warning sign in our investment analysis , you should know about...

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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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.