Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We note that iHeartMedia, Inc. (NASDAQ: IHRT) has debt on its balance sheet. But the most important question is: what risk does this debt create?
When Is Debt a Problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. 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 review for iHeartMedia
What is iHeartMedia’s debt?
As you can see below, iHeartMedia was in debt of US $ 6.04 billion, as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. However, given that it has a cash reserve of US $ 583.3 million, its net debt is less, at around US $ 5.45 billion.
How healthy is iHeartMedia’s track record?
Zooming in on the latest balance sheet data, we can see that iHeartMedia had a liability of US $ 1.02 billion owed within 12 months and a liability of US $ 7.26 billion owed beyond that. On the other hand, he had $ 583.3 million in cash and $ 788.9 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 6.90 billion.
This deficit casts a shadow over the $ 3.16 billion company, like a colossus towering over mere mortals. So we would be watching its record closely, without a doubt. Ultimately, iHeartMedia would likely need a major recapitalization if its creditors demanded repayment.
We measure a company’s debt load relative to its earning capacity 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 costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Low interest coverage of 0.48 times and an unusually high net debt to EBITDA ratio of 9.0 hit our confidence in iHeartMedia like a punch in the gut. The debt burden here is considerable. Fortunately, iHeartMedia has increased its EBIT by 4.4% over the past year, slowly reducing its debt to earnings. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine iHeartMedia’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, iHeartMedia has recorded free cash flow of 88% of its EBIT, which is higher than what we usually expected. This puts him in a very strong position to pay off the debt.
Our point of view
At first glance, iHeartMedia’s interest coverage left us hesitant about the stock, and its total liability level was no more appealing than the single empty restaurant on the busiest night of the year. But at least it’s pretty decent to convert EBIT into free cash flow; it’s encouraging. Overall, we think it’s fair to say that iHeartMedia has enough debt that there is real risk around the balance sheet. If all goes well, this should increase returns, but on the other hand, the risk of permanent capital loss is increased by debt. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that iHeartMedia displays 2 warning signs in our investment analysis , and 1 of them concerns …
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 the mentioned stocks.
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