November 2, 2024

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We Think News (NASDAQ:NWSA) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies News Corporation (NASDAQ:NWSA) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for News

What Is News’s Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 News had US$2.24b of debt, an increase on US$1.18b, over one year. However, its balance sheet shows it holds US$2.24b in cash, so it actually has US$1.00m net cash.

debt-equity-history-analysis

debt-equity-history-analysis

How Strong Is News’ Balance Sheet?

The latest balance sheet data shows that News had liabilities of US$3.23b due within a year, and liabilities of US$4.39b falling due after that. Offsetting this, it had US$2.24b in cash and US$1.55b in receivables that were due within 12 months. So it has liabilities totalling US$3.84b more than its cash and near-term receivables, combined.

This deficit isn’t so bad because News is worth a massive US$13.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, News also has more cash than debt, so we’re pretty confident it can manage its debt safely.

In addition to that, we’re happy to report that News has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine News’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While News has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, News generated free cash flow amounting to a very robust 98% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although News’s balance sheet isn’t particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.00m. And it impressed us with free cash flow of US$847m, being 98% of its EBIT. So is News’s debt a risk? It doesn’t seem so to us. Another factor that would give us confidence in News would be if insiders have been buying shares: if you’re conscious of that signal too, you can find out instantly by clicking this link.

At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 account of your objectives, 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 stocks mentioned.

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