These 4 metrics indicate that RCS MediaGroup (BIT: RCS) uses debt extensively

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it might be obvious, then, that you need to factor in debt, when you think about how risky a given stock is because too much debt can sink a business. We notice that RCS MediaGroup SpA (BIT: RCS) has debt on its balance sheet. But does this debt worry shareholders?

What risk does debt entail?

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 common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest review for RCS MediaGroup

How much debt is RCS MediaGroup?

As you can see below, RCS MediaGroup had € 91.3m in debt in December 2020, up from € 158.7m a year earlier. On the other hand, it has € 50.8 million in cash, leading to a net debt of around € 40.5 million.

BIT: RCS Debt to Equity History April 20, 2021

How strong is RCS MediaGroup’s balance sheet?

The most recent balance sheet shows that RCS MediaGroup had liabilities of € 300.9 million due within one year and liabilities of € 355.2 million beyond. In return for these obligations, he had cash of € 50.8 million as well as receivables valued at € 196.4 million within 12 months. Its liabilities thus total € 408.9 million more than the combination of its cash and short-term receivables.

Given that this deficit is actually greater than the company’s market cap of 381.3 million euros, we believe shareholders should really watch RCS MediaGroup’s debt levels, like a parent watching their child do. cycling for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution.

In order to size a company’s debt relative to its profit, we calculate its net debt divided by its profit before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and tax (EBIT) divided by its interest expense. (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

While RCS MediaGroup’s low debt-to-EBITDA ratio of 0.64 suggests only a modest use of debt, the fact that EBIT only covers interest costs 4.1 times last year we lets think. We therefore recommend that you closely monitor the impact of financing costs on the business. Shareholders should know that RCS MediaGroup’s EBIT fell 64% last year. If this earnings trend continues, paying off debt will be about as easy as raising cats on a roller coaster. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether RCS MediaGroup can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

Finally, a business can only pay off its debts with cash, not book profits. We must therefore clearly examine whether this EBIT leads to a corresponding free cash flow. Over the past three years, RCS MediaGroup has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

Our point of view

Neither RCS MediaGroup’s ability to increase its EBIT nor its total liability level gave us confidence in its ability to take on more debt. But the good news is that it seems to be able to easily convert EBIT into free cash flow. When we consider all the factors discussed, it seems to us that RCS MediaGroup is taking risks with its use of debt. While this debt can increase returns, we believe the company now has sufficient leverage. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 3 warning signs for RCS MediaGroup which you should be aware of before investing here.

If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash-flow net-growth stocks right now.

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