Does Grupo Televisa (BMV: TLEVISACPO) use too much debt?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. We notice that Grupo Televisa, SAB (BMV: TLEVISACPO) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. 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 shareholders because lenders are forcing them to raise capital at a difficult price. Of course, debt can be an important tool in businesses, especially large cap companies. When we look at debt levels, we first look at cash and debt levels, together.
Discover our latest analysis for Grupo Televisa
What is the debt of Grupo Televisa?
You can click on the graph below for historical figures, but it shows that Grupo Televisa had Mexican $ 124.8 billion in debt in March 2021, up from Mexican $ 160.6 billion a year earlier. However, he has 28.9 billion Mexican dollars in cash, resulting in net debt of around 96.0 billion Mexican dollars.
A look at the responsibilities of Grupo Televisa
According to the latest published balance sheet, Grupo Televisa had liabilities of 59.9 billion Mexicans due within 12 months and liabilities of 140.4 billion Mexican dollars beyond 12 months. In return, it had M $ 28.9 billion in cash and M $ 37.9 billion in receivables due within 12 months. Its liabilities therefore total Mex $ 133.5 billion more than the combination of its cash and short-term receivables.
That’s a mountain of debt compared to its market cap of Mex $ 146.6 billion. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
In order to size a company’s debt against its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest expense. (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
While we are not worried about Grupo Televisa’s net debt to EBITDA ratio of 2.5, we do believe that its extremely low interest coverage of 1.8 times is a sign of high leverage. Much of this is due to the company’s large depreciation charges, which arguably means its EBITDA is a very generous measure of earnings and its debt may be heavier than it first appears. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. It is important to note that Grupo Televisa’s EBIT has been essentially stable over the past twelve months. We would rather see some growth in earnings as it always helps reduce debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the future profitability of the business will decide whether Grupo Televisa can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with cash, not book profits. We therefore always check the part of this EBIT which translates into free cash flow. Over the past three years, Grupo Televisa’s free cash flow has amounted to 45% of its EBIT, which is less than expected. This low cash conversion makes debt management more difficult.
Our point of view
Reflecting on Grupo Televisa’s attempt to cover its interest costs with its EBIT, we are certainly not enthusiastic. That said, its ability to convert EBIT into free cash flow is not such a concern. Looking at the big picture, it seems clear to us that Grupo Televisa’s use of debt creates risks for the company. If all goes well, it can pay off, but the downside to this debt is a greater risk of permanent losses. 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. For example, we have identified 2 warning signs for Grupo Televisa (1 cannot be ignored) that you should be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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