Health Check: How Prudently Does iHeartMedia (NASDAQ:IHRT) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies iHeartMedia, Inc. (NASDAQ:IHRT) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for iHeartMedia

What Is iHeartMedia's Net Debt?

As you can see below, iHeartMedia had US$6.04b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$529.1m in cash, and so its net debt is US$5.51b.

How Strong Is iHeartMedia's Balance Sheet?

According to the last reported balance sheet, iHeartMedia had liabilities of US$733.5m due within 12 months, and liabilities of US$7.50b due beyond 12 months. Offsetting this, it had US$529.1m in cash and US$704.1m in receivables that were due within 12 months. So it has liabilities totalling US$7.00b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$3.14b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, iHeartMedia would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine iHeartMedia's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, iHeartMedia made a loss at the EBIT level, and saw its revenue drop to US$2.9b, which is a fall of 22%. That makes us nervous, to say the least.

Caveat Emptor

Not only did iHeartMedia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$27m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$468m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 3 warning signs for iHeartMedia (1 doesn't sit too well with us) you should be aware of.

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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