Zee Entertainment Enterprises (NSE:ZEEL) Seems To Use Debt Quite Sensibly

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. Importantly, Zee Entertainment Enterprises Limited (NSE:ZEEL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zee Entertainment Enterprises

What Is Zee Entertainment Enterprises's Debt?

The image below, which you can click on for greater detail, shows that Zee Entertainment Enterprises had debt of ₹6.68b at the end of September 2020, a reduction from ₹10.9b over a year. However, it does have ₹18.0b in cash offsetting this, leading to net cash of ₹11.3b.

A Look At Zee Entertainment Enterprises's Liabilities

According to the last reported balance sheet, Zee Entertainment Enterprises had liabilities of ₹22.3b due within 12 months, and liabilities of ₹5.34b due beyond 12 months. Offsetting this, it had ₹18.0b in cash and ₹20.1b in receivables that were due within 12 months. So it can boast ₹10.5b 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!

In fact Zee Entertainment Enterprises's saving grace is its low debt levels, because its EBIT has tanked 66% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zee Entertainment Enterprises 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 5.8% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down 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 ₹11.3b, as well as more liquid assets than liabilities. So we are not troubled with Zee Entertainment Enterprises's debt use. We'd be motivated to research the stock further if we found out that Zee Entertainment Enterprises insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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