Here's Why Zee Media (NSE:ZEEMEDIA) Can Afford Some Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Zee Media Corporation Limited (NSE:ZEEMEDIA) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zee Media

What Is Zee Media's Net Debt?

The image below, which you can click on for greater detail, shows that Zee Media had debt of ₹1.96b at the end of March 2023, a reduction from ₹2.14b over a year. On the flip side, it has ₹139.7m in cash leading to net debt of about ₹1.82b.

A Look At Zee Media's Liabilities

According to the last reported balance sheet, Zee Media had liabilities of ₹3.31b due within 12 months, and liabilities of ₹1.55b due beyond 12 months. On the other hand, it had cash of ₹139.7m and ₹1.40b worth of receivables due within a year. So its liabilities total ₹3.31b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Zee Media has a market capitalization of ₹5.88b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zee Media's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Zee Media made a loss at the EBIT level, and saw its revenue drop to ₹7.2b, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While Zee Media's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹261m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₹688m. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Zee Media (1 is potentially serious) you should be aware of.

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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