Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Hemisphere Media Group, Inc. (NASDAQ:HMTV) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hemisphere Media Group

What Is Hemisphere Media Group's Net Debt?

As you can see below, Hemisphere Media Group had US$206.1m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$79.5m in cash offsetting this, leading to net debt of about US$126.6m.

A Look At Hemisphere Media Group's Liabilities

According to the last reported balance sheet, Hemisphere Media Group had liabilities of US$30.0m due within 12 months, and liabilities of US$230.2m due beyond 12 months. On the other hand, it had cash of US$79.5m and US$33.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$147.7m.

This deficit isn't so bad because Hemisphere Media Group is worth US$474.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).