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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. As with many other companies Comcast Corporation<\/strong> (NASDAQ:CMCSA<\/a>) makes use of debt. But the real question is whether this debt is making the company risky. <\/p>\n Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together. <\/p>\n See our latest analysis for Comcast <\/a><\/span><\/p>\n You can click the graphic below for the historical numbers, but it shows that Comcast had US$97.6b of debt in September 2022, down from US$102.4b, one year before. However, it does have US$5.70b in cash offsetting this, leading to net debt of about US$91.9b. <\/p>\n According to the last reported balance sheet, Comcast had liabilities of US$28.0b due within 12 months, and liabilities of US$145.0b due beyond 12 months. On the other hand, it had cash of US$5.70b and US$11.9b worth of receivables due within a year. So it has liabilities totalling US$155.4b more than its cash and near-term receivables, combined. <\/p>\n Given this deficit is actually higher than the company’s massive market capitalization of US$151.2b, we think shareholders really should watch Comcast’s debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. <\/p>\n In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses. <\/p>\n Comcast has net debt worth 2.5 times EBITDA, which isn’t too much, but its interest cover looks a bit on the low side, with EBIT at only 5.7 times the interest expense. While these numbers do not alarm us, it’s worth noting that the cost of the company’s debt is having a real impact. If Comcast can keep growing EBIT at last year’s rate of 15% over the last year, then it will find its debt load easier to manage. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Comcast can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts<\/a> to be interesting. <\/p>\n Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Comcast produced sturdy free cash flow equating to 65% of its EBIT, about what we’d expect. This free cash flow puts the company in a good position to pay down debt, when appropriate. <\/p>\n Even if we have reservations about how easily Comcast is capable of staying on top of its total liabilities, its conversion of EBIT to free cash flow and EBIT growth rate make us think feel relatively unconcerned. We think that Comcast’s debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. We’ve identified 4 warning signs <\/strong> with Comcast <\/a>, and understanding them should be part of your investment process. <\/p>\n When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt<\/a> 100% free<\/strong>, right now. <\/p>\n What are the risks and opportunities for Comcast?<\/p>\n When Is Debt Dangerous? <\/h2>\n
What Is Comcast’s Net Debt? <\/h2>\n
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How Strong Is Comcast’s Balance Sheet? <\/h2>\n
Our View<\/h2>\n