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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.’ 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 can see that The New York Times Company (NYSE:NYT) does use debt in its business. But the real question is whether this debt is making the company risky.
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is New York Times’s Debt?
As you can see below, New York Times had US$254.5m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. But it also has US$623.8m in cash to offset that, meaning it has US$369.2m net cash.
How Strong Is New York Times’s Balance Sheet?
According to the last reported balance sheet, New York Times had liabilities of US$636.3m due within 12 months, and liabilities of US$498.4m due beyond 12 months. Offsetting this, it had US$623.8m in cash and US$184.4m in receivables that were due within 12 months. So its liabilities total US$326.6m more than the combination of its cash and short-term receivables.
Since publicly traded New York Times shares are worth a total of US$5.79b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Given that New York Times has more cash than debt, we’re pretty confident it can manage its debt safely.
On the other hand, New York Times’s EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine New York Times’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While New York Times has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, New York Times’s free cash flow amounted to 34% of its EBIT, less than we’d expect. That’s not great, when it comes to paying down debt.
We could understand if investors are concerned about New York Times’s liabilities, but we can be reassured by the fact it has has net cash of US$369m. So we are not troubled with New York Times’s debt use. We’d be motivated to research the stock further if we found out that New York Times insiders have bought shares recently. If you would too, then you’re in luck, since today we’re sharing our list of reported insider transactions for free.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.