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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Network18 Media & Investments Limited (NSE:NETWORK18) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Network18 Media & Investments
What Is Network18 Media & Investments's Debt?
As you can see below, at the end of March 2019, Network18 Media & Investments had ₹30.1b of debt, up from ₹22.2b a year ago. Click the image for more detail. On the flip side, it has ₹3.50b in cash leading to net debt of about ₹26.6b.
A Look At Network18 Media & Investments's Liabilities
We can see from the most recent balance sheet that Network18 Media & Investments had liabilities of ₹49.3b falling due within a year, and liabilities of ₹2.93b due beyond that. Offsetting this, it had ₹3.50b in cash and ₹14.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹34.7b.
When you consider that this deficiency exceeds the company's ₹26.1b market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).