The outside fund manager, backed by Charlie Munger of Berkshire Hathaway, Li Lu, makes no bones about it when he says, “The biggest investment risk is not price volatility, but whether you suffer a permanent capital loss.” So it seems like the smart money knows that debt – which is usually involved in bankruptcy – is a very important factor when judging how risky a business is. As with many other companies Asian Pay Television Trust SGX: S7OU) uses debt. But should shareholders be concerned about using debt?
Why does debt involve risks?
Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. While not so common, we often see debt-ridden corporations permanently diluting their shareholders as lenders force them to raise capital at a harrowing price. Of course, many companies use debt to finance growth without negative consequences. When we examine debt levels, we first look at both cash and debt levels together.
How Much Debt Does the Asian TV Trust Bear?
As you can see below, Asian Pay Television Trust had S $ 1.53 billion in debt in December 2020, which is about the same as the year before. You can click on the chart for more details. On the other hand, it has S $ 97.0 million in cash, leading to a net debt of approximately S $ 1.44 billion.
A look at the obligations of Asian Pay Television Trust
If we zoom in on the latest balance sheet data, we can see that Asian Pay Television Trust had debt of S $ 289.1 million within 12 months and outside debt of S $ 1.47 billion. To offset these obligations, it had cash of S $ 97.0 million and receivables of S $ 14.5 million within 12 months. So his liabilities weigh S $ 1.65 billion higher than the sum of his cash and (short-term) receivables.
This deficit casts a shadow over the $ 200.5 million company, like a colossus towering over mere mortals. So no doubt we would keep a close eye on the balance. After all, the Asian Pay Television Trust would likely need a major recapitalization if it had to pay its creditors today.
We use two main ratios to inform ourselves about the level of debt to earnings. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how many times earnings before interest and taxes (EBIT) cover the interest expense (or interest coverage for short). . In this way, we look at both the absolute amount of the debt and the interest rates paid on it.
Asian Pay Television Trust shareholders are facing the double whammy of a high net debt / EBITDA ratio (8.5) and fairly weak interest coverage as EBIT is only 1.8 times interest expense. The debt burden here is considerable. Fortunately, Asian Pay Television Trust’s EBIT grew 3.7% over the past year, slowly decreasing debt relative to earnings. The balance sheet is clearly the area to focus on when analyzing debt. But it is primarily future earnings that will determine the Asian Pay Television Trust’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free report on analyst earnings expectations be interesting.
But our final consideration is also important, because a company cannot pay off debt with paper profits; it needs cold hard cash. So the logical step is to look at the part of that EBIT that corresponds to the actual free cash flow. Over the past three years, Asian Pay Television Trust has generated free cash flow of 88% of its EBIT, more than we expected. That puts it in a very strong position to pay off debt.
To be fair, both Asian Pay Television Trust’s net debt to EBITDA and track record of staying on top of its total liabilities make us quite uncomfortable with its debt level. But at least it’s pretty decent to convert EBIT into free cash flow; that is encouraging. Looking at the bigger picture, it seems clear to us that Asian Pay Television Trust’s use of debt carries risks to the company. If all goes well, that should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. When analyzing debt levels, balance sheet is the obvious place to start. Ultimately, however, any business can involve off-balance-sheet risks. To do that, you need to learn more about the 3 warning signs we spotted with Asian Pay Television Trust (including 1 that cannot be ignored)
After all that, if you’re more interested in a fast-growing company with a rock-solid balance sheet, check it out our list of net cash growth stocks without delay.
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