SKY Network Television (NZSE: SKT) has a pretty healthy track record
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu doesn’t care when he says, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital ”. So it might be obvious, then, that you need to factor in debt, when you think about how risky a given stock is because too much debt can sink a business. Mostly, SKY Network Television Limited (NZSE: SKT) is in debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest review for SKY Network Television
How much debt is SKY Network Television?
The image below, which you can click for more details, shows SKY Network Television owed NZ $ 101.5 million in debt at the end of December 2020, a reduction of 217.0 million of New Zealand dollars over one year. However, he has NZ $ 123.3 million offsetting this, which leads to a net cash position of NZ $ 21.7 million.
How healthy is SKY Network Television’s track record?
We can see from the most recent balance sheet that SKY Network Television had a liability of NZ $ 325.3 million maturing in one year and a liability of NZ $ 57.9 million beyond. In return, he had NZ $ 123.3 million in cash and NZ $ 54.1 million in receivables due within 12 months. It therefore has liabilities totaling NZ $ 205.8 million more than its cash and short-term receivables combined.
This is a mountain of leverage compared to its market cap of NZ $ 297.0 million. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution. Despite its notable responsibilities, SKY Network Television enjoys a clean cash flow, so it’s fair to say that it doesn’t have a heavy debt!
And we also warmly note that SKY Network Television increased its EBIT by 16% last year, making its debt more manageable. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the future profitability of the business will decide whether SKY Network Television can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, while the tax authorities love accounting profits, lenders only accept cash. SKY Network Television may have net cash on the balance sheet, but it’s always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its operations. ability to manage debt. Over the past three years, SKY Network Television has recorded free cash flow totaling 87% of its EBIT, which is higher than what we normally expect. This positions it well to repay debt if it is desirable.
While SKY Network Television’s balance sheet is not particularly strong, due to total liabilities it is clearly positive that it has net cash of NZ $ 21.7 million. Best of all, 87% of that EBIT was converted to free cash flow, which brought in NZ $ 123 million. We are therefore not concerned with the use of debt by SKY Network Television. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – SKY Network Television has 1 warning sign we think you should be aware of this.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
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