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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zee Entertainment Enterprises

What Is Zee Entertainment Enterprises's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zee Entertainment Enterprises had ₹3.17b of debt in March 2021, down from ₹5.97b, one year before. But it also has ₹22.0b in cash to offset that, meaning it has ₹18.8b net cash.

How Healthy Is Zee Entertainment Enterprises' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zee Entertainment Enterprises had liabilities of ₹25.4b due within 12 months and liabilities of ₹1.74b due beyond that. On the other hand, it had cash of ₹22.0b and ₹19.5b worth of receivables due within a year. So it can boast ₹14.3b more liquid assets than total liabilities.

This short term liquidity is a sign that Zee Entertainment Enterprises could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 saw its EBIT drop by 9.2% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Looking at the most recent three years, Zee Entertainment Enterprises recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying 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 ₹18.8b, as well as more liquid assets than liabilities. So we are not troubled with Zee Entertainment Enterprises's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Zee Entertainment Enterprises , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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