Stock Analysis

We Think iHeartMedia (NASDAQ:IHRT) Is Taking Some Risk With Its Debt

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NasdaqGS:IHRT
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, iHeartMedia, Inc. (NASDAQ:IHRT) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for iHeartMedia

What Is iHeartMedia's Net Debt?

You can click the graphic below for the historical numbers, but it shows that iHeartMedia had US$5.73b of debt in December 2021, down from US$6.05b, one year before. On the flip side, it has US$355.2m in cash leading to net debt of about US$5.38b.

debt-equity-history-analysis
NasdaqGS:IHRT Debt to Equity History April 24th 2022

A Look At iHeartMedia's Liabilities

We can see from the most recent balance sheet that iHeartMedia had liabilities of US$849.4m falling due within a year, and liabilities of US$7.12b due beyond that. Offsetting these obligations, it had cash of US$355.2m as well as receivables valued at US$1.05b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.56b.

The deficiency here weighs heavily on the US$2.57b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, iHeartMedia would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.72 times and a disturbingly high net debt to EBITDA ratio of 7.6 hit our confidence in iHeartMedia like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. However, it should be some comfort for shareholders to recall that iHeartMedia actually grew its EBIT by a hefty 2,851%, over the last 12 months. If that earnings trend continues it will make its debt load much more manageable in the future. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, iHeartMedia produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

On the face of it, iHeartMedia's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that iHeartMedia's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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 example, we've discovered 2 warning signs for iHeartMedia (1 can't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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