These 4 Measures Indicate That Saga Communications (NASDAQ:SGA) Is Using Debt Reasonably Well

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. As with many other companies Saga Communications, Inc. (NASDAQ:SGA) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Saga Communications

What Is Saga Communications's Net Debt?

The chart below, which you can click on for greater detail, shows that Saga Communications had US$10.0m in debt in September 2020; about the same as the year before. But it also has US$48.3m in cash to offset that, meaning it has US$38.3m net cash.

A Look At Saga Communications' Liabilities

The latest balance sheet data shows that Saga Communications had liabilities of US$14.7m due within a year, and liabilities of US$40.3m falling due after that. Offsetting this, it had US$48.3m in cash and US$14.9m in receivables that were due within 12 months. So it can boast US$8.25m more liquid assets than total liabilities.

This short term liquidity is a sign that Saga Communications could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Saga Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Saga Communications if management cannot prevent a repeat of the 85% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Saga Communications 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Saga Communications 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, Saga Communications produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Saga Communications has net cash of US$38.3m, as well as more liquid assets than liabilities. So we don't have any problem with Saga Communications's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Saga Communications (1 is concerning) 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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