These 4 metrics indicate that iHeartMedia (NASDAQ:IHRT) is using debt a lot

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that iHeartMedia, Inc. (NASDAQ: IHRT) uses debt in its business. 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, 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 frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for iHeartMedia

What is iHeartMedia’s net debt?

The image below, which you can click for more details, shows iHeartMedia had $5.79 billion in debt at the end of September 2021, a reduction from $6.06 billion year-over-year. However, since he has a cash reserve of $369.1 million, his net debt is less, at around $5.42 billion.

NasdaqGS: IHRT Debt to Equity History January 19, 2022

How healthy is iHeartMedia’s balance sheet?

The latest balance sheet data shows that iHeartMedia had liabilities of US$782.3 million due within one year, and liabilities of US$7.23 billion falling due thereafter. As compensation for these obligations, it had cash of US$369.1 million and receivables valued at US$858.0 million due within 12 months. It therefore has liabilities totaling $6.79 billion more than its cash and short-term receivables, combined.

The deficiency here weighs heavily on the $2.84 billion business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. . We would therefore be watching his balance sheet closely, no doubt. Ultimately, iHeartMedia would likely need a major recapitalization if its creditors were to demand repayment.

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). Thus, we consider debt to earnings with and without amortization and depreciation expense.

iHeartMedia shareholders face the double whammy of a high net debt to EBITDA ratio (8.0) and quite low interest coverage, as EBIT is only 0.68 times expenses of interests. The debt burden here is considerable. However, shareholders should be reassured to remember that iHeartMedia has actually increased its EBIT by 373% over the past 12 months. If this earnings trend continues, it will make its leverage much more manageable in the future. There is no doubt that we learn the most about debt from the balance sheet. But it’s future earnings, more than anything, that will determine iHeartMedia’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, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, iHeartMedia has generated free cash flow of a very strong 83% of EBIT, more than expected. This puts him in a very strong position to pay off the debt.

Our point of view

At first glance, iHeartMedia’s interest coverage left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night of the year. But on the bright side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. Once we consider all of the above factors together, it seems to us that iHeartMedia’s debt makes it a bit risky. Some people like that kind of risk, but we’re aware of the potential pitfalls, so we’d probably prefer it to take on less debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with iHeartMedia.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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.

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John A. Bogar