Zee Media (NSE:ZEEMEDIA) Seems To Use Debt Rather Sparingly

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 Media Corporation Limited (NSE:ZEEMEDIA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zee Media

What Is Zee Media's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Zee Media had ₹2.32b of debt, an increase on ₹1.18b, over one year. But on the other hand it also has ₹4.55b in cash, leading to a ₹2.23b net cash position.

How Healthy Is Zee Media's Balance Sheet?

The latest balance sheet data shows that Zee Media had liabilities of ₹2.66b due within a year, and liabilities of ₹3.07b falling due after that. Offsetting these obligations, it had cash of ₹4.55b as well as receivables valued at ₹2.38b due within 12 months. So it can boast ₹1.20b more liquid assets than total liabilities.

This surplus suggests that Zee Media is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Zee Media boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Zee Media grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zee Media will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zee Media 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. During the last three years, Zee Media produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Zee Media has ₹2.23b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 44% over the last year. So is Zee Media's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Zee Media .

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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