Should music broadcast aim to reduce debt?

David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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. We note that Music Broadcast Limited (NSE:RADIOCITY) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

How Much Debt Does Music Broadcast Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Music Broadcast had ₹875.7m of debt, an increase on none, over one year. However, it does have ₹813.1m in cash offsetting this, leading to net debt of about ₹62.6m.

How Healthy Is Music Broadcast’s Balance Sheet?
According to the last reported balance sheet, Music Broadcast had liabilities of ₹387.8m due within 12 months, and liabilities of ₹1.03b due beyond 12 months. Offsetting this, it had ₹813.1m in cash and ₹729.4m in receivables that were due within 12 months. So it actually has ₹124.5m more liquid assets than total liabilities.

This surplus suggests that Music Broadcast has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Music Broadcast has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Music Broadcast can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Music Broadcast reported revenue of ₹2.1b, which is a gain of 6.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor
Importantly, Music Broadcast had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹47m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of ₹87m and profit of ₹46m over the last year. So it seems too risky for our taste. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Be aware that Music Broadcast is showing 4 warning signs in our investment analysis , you should know about. Simply Wall