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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We note that MediaCo Holding Inc. (NASDAQ: MDIA) has debt on its balance sheet. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for MediaCo Holding
What is MediaCo Holding’s net debt?
The graph below, which you can click for more details, shows that MediaCo Holding had $ 97.2 million in debt as of September 2021; about the same as the year before. However, he also had $ 7.40 million in cash, so his net debt is $ 89.8 million.
How strong is MediaCo Holding’s balance sheet?
According to the latest published balance sheet, MediaCo Holding had liabilities of US $ 18.0 million due in 12 months and liabilities of US $ 121.9 million due beyond 12 months. In compensation for these obligations, it had cash of US $ 7.40 million as well as receivables valued at US $ 14.5 million due within 12 months. Its liabilities therefore total US $ 118.0 million more than the combination of its cash and short-term receivables.
The lack here weighs heavily on the $ 51.5 million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. . We therefore believe that shareholders should watch it closely. Ultimately, MediaCo Holding would likely need a major recapitalization if its creditors demanded repayment.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we consider debt versus earnings with and without amortization expenses.
Low interest coverage of 0.49 times and an unusually high Net Debt to EBITDA ratio of 9.0 shook our confidence in MediaCo Holding like a punch in the stomach. This means that we would consider him to be in heavy debt. However, the bright side is that MediaCo Holding achieved positive EBIT of US $ 5.3 million over the past twelve months, an improvement over the loss of the previous year. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since MediaCo Holding will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) are converted into actual free cash flow. Over the past year, MediaCo Holding has reported free cash flow of 4.6% of its EBIT, which is really quite low. For us, the conversion to cash that elicits a bit of paranoia is the ability to extinguish debt.
Our point of view
At first glance, MediaCo Holding’s interest coverage left us hesitant about the stock, and its total liability level was no more appealing than the lone empty restaurant on the busiest night of the year. That said, his ability to increase his EBIT is not that much of a concern. Considering all of the above factors, it seems that MediaCo Holding has too much debt. This kind of risk is acceptable to some, but it certainly does not float our boat. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. We have identified 3 warning signs with MediaCo Holding, and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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