Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. 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. Mostly, Nexstar Media Group, Inc. (NASDAQ:NXST) is in debt. But the more important question is: what risk does this debt create?

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 usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Nexstar Media Group

What is Nexstar Media Group’s net debt?

You can click on the chart below for historical numbers, but it shows Nexstar Media Group had US$7.18 billion in debt in September 2022, up from US$7.55 billion a year prior. However, he also had $346.6 million in cash, so his net debt is $6.83 billion.

debt-equity-history-analysis
NasdaqGS: NXST Historical Debt to Equity January 24, 2023

How healthy is Nexstar Media Group’s balance sheet?

We can see from the most recent balance sheet that Nexstar Media Group had liabilities of US$915.1 million due within one year, and liabilities of US$9.23 billion due beyond. . As compensation for these obligations, it had cash of US$346.6 million and receivables valued at US$986.9 million due within 12 months. It therefore has liabilities totaling $8.82 billion more than its cash and short-term receivables, combined.

When you consider that shortfall exceeds the company’s US$7.07 billion market capitalization, you might well be inclined to take a close look at the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Nexstar Media Group’s debt is 3.6 times its EBITDA, and its EBIT covers its interest expense 4.7 times. Taken together, this implies that, while we wouldn’t like to see debt levels increase, we think he can manage his current leverage. Unfortunately, Nexstar Media Group’s EBIT actually fell 2.1% over the past year. If earnings continue to fall, managing that debt will be as difficult as delivering hot soup on a unicycle. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Nexstar Media Group can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Nexstar Media Group has recorded free cash flow of 80% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.

Our point of view

Neither Nexstar Media Group’s ability to manage its total liabilities nor its net debt to EBITDA 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 to free cash flow. Considering the above factors, we believe Nexstar Media Group’s debt poses certain risks to the business. While this debt may 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. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 3 warning signs for Nexstar Media Group you should be aware, and one of them is concerning.

If after all this you are more interested in a fast growing company with a strong balance sheet, then check out our list of net cash growth stocks without further ado.

What are the risks and opportunities for Nexstar Media Group?

Nexstar Media Group, Inc., a television broadcasting and digital media company, is focused on the acquisition, development and operation of television stations and interactive community websites and digital media services in the United States.

See the full analysis

Awards

  • Trades 64.9% below our estimate of its fair value

  • Revenue increased by 10.4% over the past year

Risks

  • Revenues are expected to decline an average of 1.2% per year over the next 3 years

  • Significant insider selling in the last 3 months

  • Has a high level of debt

See all risks and rewards

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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