Is New Delhi Television (NSE:NDTV) a risky investment?
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies New Delhi Television Limited (NSE:NDTV) uses debt. But the more important question is: what risk does this debt create?
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for New Delhi Television
What is New Delhi Television’s debt?
You can click on the graph below for historical figures, but it shows New Delhi TV had a debt of ₹517.9 million in September 2021, up from ₹886.9 million a year before. However, he has ₹291.3 million in cash to offset this, resulting in a net debt of around ₹226.6 million.
A look at the responsibilities of New Delhi Television
According to the latest published balance sheet, New Delhi Television had liabilities of ₹2.08 billion due within 12 months and liabilities of ₹249.2 million due beyond 12 months. In return, he had ₹291.3 million in cash and ₹1.24 billion in receivables due within 12 months. It therefore has liabilities totaling ₹798.3 million more than its cash and short-term receivables, combined.
Given that New Delhi Television’s listed shares are worth a total of ₹8.74 billion, it seems unlikely that this level of liabilities will pose a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
While New Delhi Television’s low debt to EBITDA ratio of 0.42 suggests only modest debt usage, the fact that EBIT covered interest expense by only 6.6 times last year makes us think. But the interest payments are certainly enough to make us think about the affordability of its debt. Fortunately, New Delhi Television’s burden is not too heavy, as its EBIT fell by 34% compared to last year. When a company sees its profit reservoir, it can sometimes see its relationship with its lenders turn sour. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of New Delhi Television that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cash, not book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, New Delhi Television’s free cash flow amounted to 41% of its EBIT, less than expected. It’s not great when it comes to paying off debt.
Our point of view
New Delhi Television’s struggle to increase EBIT made us doubt the strength of its balance sheet, but the other data points we considered were relatively rewarding. For example, its net debt to EBITDA ratio was refreshing. Looking at all the angles discussed above, it does seem to us that New Delhi Television is a somewhat risky investment due to its leverage. Not all risk is bad, as it can boost stock returns if it pays off, but this leverage risk is worth keeping in mind. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that New Delhi Television broadcasts 2 warning signs in our investment analysis you should know…
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.