Grupo Televisa (BMV:TLEVISACPO) takes some risk with its use of debt

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Televisa Group, SAB (BMV: TLEVISACPO) is in debt. But does this debt worry shareholders?

What risk does debt carry?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for Grupo Televisa

What is Grupo Televisa’s debt?

The image below, which you can click on for more details, shows that Grupo Televisa had a debt of 113.7 billion pesos at the end of June 2022, a reduction from 122.2 billion pesos year on year. However, he has 59.9 billion pesos in cash to offset this, resulting in a net debt of around 53.8 billion pesos.

BMV:TLEVISA CPO Debt to Equity August 16, 2022

How healthy is Grupo Televisa’s balance sheet?

According to the latest published balance sheet, Grupo Televisa had debts of 38.9 billion pesos due within 12 months and debts of 131.0 billion pesos over 12 months. In return, it had 59.9 billion pesos in cash and 25.6 billion pesos in debt due within 12 months. Thus, its liabilities total 84.4 billion Mexican dollars more than the combination of its cash and short-term receivables.

When you consider that this shortfall exceeds the company’s market capitalization of 84.1 billion Mexican dollars, you might well be inclined to take a close look at the balance sheet. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Given its net debt to EBITDA ratio of 1.2 and interest coverage of 2.7 times, it seems to us that Grupo Televisa is probably using debt quite sensibly. We therefore recommend that you closely monitor the impact of financing costs on the business. Above all, Grupo Televisa has increased its EBIT by 57% in the last twelve months, and this growth will make it easier to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Grupo Televisa can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Grupo Televisa has created free cash flow amounting to 15% of its EBIT, an uninspiring performance. This low level of cash conversion compromises its ability to manage and repay its debt.

Our point of view

Neither Grupo Televisa’s ability to cover its interest charges with its EBIT nor its level of total liabilities gave us confidence in its ability to take on more debt. But the good news is that it looks like it could easily increase its EBIT. Considering the above factors, we believe that Grupo Televisa’s debt poses certain risks to the business. While this debt may increase returns, we believe the company now has sufficient leverage. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you have also achieved this achievement, you are in luck, because today you can consult this interactive graph of the historical earnings per share of Grupo Televisa for free.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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