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Some say 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Raj Television Network Limited (NSE:RAJTV) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Raj Television Network
What Is Raj Television Network's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Raj Television Network had ₹360.3m of debt in March 2019, down from ₹425.1m, one year before. However, because it has a cash reserve of ₹22.9m, its net debt is less, at about ₹337.4m.
How Healthy Is Raj Television Network's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Raj Television Network had liabilities of ₹288.3m due within 12 months and liabilities of ₹199.3m due beyond that. Offsetting these obligations, it had cash of ₹22.9m as well as receivables valued at ₹527.4m due within 12 months. So it actually has ₹62.7m more liquid assets than total liabilities.
This surplus suggests that Raj Television Network has a conservative balance sheet, and could probably eliminate its debt without much difficulty.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Raj Television Network has net debt worth 1.6 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 3.1 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Notably, Raj Television Network's EBIT launched higher than Elon Musk, gaining a whopping 211% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Raj Television Network will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.