Some say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ So it becomes clear that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We will see that Corus Entertainment Inc. (TSE:CJR.B) uses debt in its business. But should shareholders be concerned about its use of debt?
When is Debt Dangerous?
In general, debt can be a real problem if a company cannot pay it off quickly, either by raising capital or with its own cash flow. If things go bad, lenders can take control of the business. However, a more frequent (but still expensive) event is where a company has to issue shares at bargain-basement prices, permanently diluting shareholders, just to increase its balance sheet. By replacing dilution, however, debt can be an excellent tool for businesses that need capital to invest in growth at a high rate of return. When we examine the level of debt, we first consider the level of money and debt, together.
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What is Corus Entertainment’s Net Debt?
As you can see below, Corus Entertainment has CA$1.26b in debt, as of February 2023, which is almost the same as last year. You can click on the chart for more details. However, as it has cash reserves of CA$57.9m, its net debt is low, at about CA$1.20b.
How Strong Is Corus Entertainment’s Balance Sheet?
According to the last reported balance, Corus Entertainment has debts of CA$658.7m due within 12 months, and debts of CA$2.09b that are beyond 12 months. To offset this, it has CA$57.9m in cash and CA$342.8m in receivables due over the 12 months. So its liabilities outweigh the value of its cash and (near term) receipts by CA$2.35b.
The deficit here weighs heavily on the CA$285.2m company itself, like a child struggling under the weight of a large backpack full of books, his sports gear, and a trumpet. . That’s why we think shareholders should keep a close eye on it. At the end of the day, Corus Entertainment will probably need a large capitalization if its creditors demand payment.
We measure a company’s net debt relative to its earning power by looking at net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and by calculating whether how quickly it earns before interest and taxes (EBIT) covers its interest. expenses (cover interest). We thus consider debt relative to earnings with and without depreciation and amortization costs.
While we wouldn’t be concerned about Corus Entertainment’s net debt to EBITDA ratio of 3.4, we think its low interest coverage of 1.7 times is a sign of high leverage. It seems clear that the cost of borrowing money negatively affects the return to shareholders, later. Even worse, Corus Entertainment has seen EBIT tank 39% over the past 12 months. If earnings continue like that over the long term, it has a snowball’s chance in hell of paying off that debt. There is no doubt that we know the most about debt from the balance sheet. But it is future earnings, more than anything else, that will determine Corus Entertainment’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 analyst earnings forecast report interesting.
Finally, while the tax man may appreciate the accounting income, the lenders will just accept cold hard cash. So we always check how much of that EBIT translates into free cash flow. Over the most recent three years, Corus Entertainment has recorded free cash flow worth 74% of its EBIT, which is normal, given free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to pay off debt, if due.
Our Perspective
Frankly Corus Entertainment’s EBIT growth rate and its track record of staying above its total liabilities make us uncomfortable with its debt levels. But at least it’s pretty decent at converting EBIT to free cash flow; that’s encouraging. We are very clear that we consider Corus Entertainment to be risky, as a result of the health of its balance sheet. For this reason we are quite cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is the obvious area to focus on when you’re analyzing debt. But ultimately, every company can have off-balance sheet risks. For that purpose, you need to know the 1 warning sign we found Corus Entertainment .
If you are interested in investing in businesses that can grow profits without the burden of debt, then check this out free list of growing businesses with net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased approach and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.