Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Above all, Nexstar Media Group, Inc. (NASDAQ: NXST) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is the debt of Nexstar Media Group?
You can click on the graph below for the historical figures, but it shows that Nexstar Media Group had a debt of US $ 7.55 billion in September 2021, down from US $ 7.88 billion a year earlier. However, he also had $ 193.8 million in cash, so his net debt is $ 7.35 billion.
NasdaqGS: NXST History of debt to equity November 17, 2021
How strong is Nexstar Media Group’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Nexstar Media Group had a liability of US $ 711.0 million due within 12 months and a liability of US $ 9.94 billion beyond. On the other hand, it had US $ 193.8 million in cash and US $ 923.0 million in receivables due within one year. Its liabilities therefore total $ 9.53 billion more than the combination of its cash and short-term receivables.
Given that this deficit is actually greater than the company’s market cap of $ 6.89 billion, we think shareholders should really watch Nexstar Media Group’s debt levels, like a parent watching their child. riding a bike for the first time. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we consider debt versus earnings with and without amortization expenses.
Nexstar Media Group has a debt / EBITDA ratio of 3.9 and its EBIT has covered its interest expense 5.0 times. This suggests that while debt levels are significant, we would stop calling them problematic. We note that Nexstar Media Group has increased its EBIT by 26% over the past year, which should make it easier to repay debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Nexstar Media Group can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Nexstar Media Group has recorded free cash flow representing 68% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
We feel some apprehension about the level of difficulty of Nexstar Media Group’s total liabilities, but we also have some bright spots to focus on. Both the growth rate of EBIT and the conversion of EBIT to free cash flow are encouraging signs. We think Nexstar Media Group’s debt makes it a bit risky, having considered the aforementioned data points together. Not all risks are bad, as they can increase stock returns if they are profitable, but this risk of leverage is worth keeping in mind. 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, Nexstar Media Group has 3 warning signs (and 1 which is significant) we think you should be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in the mentioned stocks.
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