Paramount Communications (NSE: PARACABLES) seems to be using debt quite wisely
Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Paramount Communications Limited (NSE:PARACABLES) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company 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 mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Paramount Communications
How much debt does Paramount Communications have?
The image below, which you can click on for more details, shows that Paramount Communications had ₹1.75 billion in debt at the end of March 2022, a reduction from ₹1.89 billion year on year. However, he also had ₹141.1 million in cash, and hence his net debt is ₹1.61 billion.
A look at the responsibilities of Paramount Communications
According to the latest published balance sheet, Paramount Communications had liabilities of ₹1.11 billion due within 12 months and liabilities of ₹1.69 billion due beyond 12 months. On the other hand, it had a cash position of ₹141.1 million and ₹1.74 billion in receivables due within a year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of ₹913.1 million.
While that might sound like a lot, it’s not that bad since Paramount Communications has a market capitalization of ₹2.54 billion, and so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Paramount Communications shareholders face the double whammy of a high net debt to EBITDA ratio (7.9) and fairly low interest coverage, as EBIT is only 1.7 times expenses of interests. The debt burden here is considerable. On the bright side, Paramount Communications has grown its EBIT by 46% over the past year. Like the milk of human kindness, this type of growth increases resilience, making the business more capable of managing debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Paramount Communications will need revenue to repay this debt. 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 business needs free cash flow to pay off its debts; book profits are not enough. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Paramount Communications has produced strong free cash flow equivalent to 50% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.
Our point of view
Paramount Communications’ net debt to EBITDA was a real negative in this analysis, as was its interest coverage. But its EBIT growth rate was significantly rewarding. Looking at all this data, we feel a little cautious about Paramount Communications’ debt levels. While debt has its upside in higher potential returns, we think shareholders should certainly consider how debt levels might make the stock more risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 2 warning signs for Paramount Communications (1 doesn’t sit too well with us) you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.
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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.