The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that oOh!media Limited (ASX:OML) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for oOh!media

What Is oOh!media's Debt?

As you can see below, at the end of December 2018, oOh!media had AU$407.5m of debt, up from AU$138.7m a year ago. Click the image for more detail. However, because it has a cash reserve of AU$33.0m, its net debt is less, at about AU$374.5m.

How Strong Is oOh!media's Balance Sheet?

We can see from the most recent balance sheet that oOh!media had liabilities of AU$120.7m falling due within a year, and liabilities of AU$445.8m due beyond that. Offsetting this, it had AU$33.0m in cash and AU$136.4m in receivables that were due within 12 months. So it has liabilities totalling AU$397.0m more than its cash and near-term receivables, combined.

oOh!media has a market capitalization of AU$701.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.