Let me begin with some of the eye - catching metrics that might lead an investor to consider purchasing shares of the Journal Register Company (JRC). This newspaper company has a price - to - earnings ratio of 11.3, a price - to - sales ratio of 0.93, a 5 year average return on capital of 17.6%, and a five year average pre-tax profit margin of 27.4%. Now, for the bad news. The Journal Register Company has an enterprise value - to - EBITDA ratio of 9.07 and an enterprise value - to - revenue ratio of 2.24. Obviously, this company is carrying a lot of debt. So, perhaps the multiples on the common stock price are deceptive.
There are situations in which the leverage inherent in a debt - heavy capital structure works to the benefit of the common stock holder. The most obvious example is a highly leveraged, growing company selling at a bargain price. The increase in earnings is amplified by the fixed debt, because the debt creates a sort of break even point, much like a traditional fixed cost. Just as greater production can give tremendous benefits to the owner of a large plant, or greater sales can give tremendous benefits to the owner of a large store, greater pre-tax earnings before interest charges can give tremendous benefits to the owners of common stock.
Does this scenario apply to Journal Register? Perhaps, but I don't think so. Long - term, the economics of the newspaper business will likely be quite poor. Even for Journal Register's properties, I am projecting a fall in circulation with no end in sight. Some may disagree with this assessment. However, I believe they are being overly optimistic. Past performance is only a good estimate of future performance insofar as the future resembles the past. I believe the future of newspaper publishing will be sufficiently different from the past to render any estimate of Journal Register's future performance based solely on its past performance quite inaccurate. So, for the most part, the leverage inherent to Journal Register's capital structure will likely be working against the long - term investor. Economically, Journal Register's assets are encumbered. The legal reality is immaterial to the shareholder.
The company can not sell of its assets without either paying off its debt or maintaining control over sufficient free cash flow to meet its obligations. Today, money is cheap. It may not be so cheap in the future. This is true for every business, but it takes on greater importance in the case of the Register Company UK, because of the company's debt heavy capital structure, today's historically low interest rates, and the likely future trend of newspaper circulation. Together, these three factors form a kind of perfect storm. But, it is important that the facts be assessed calmly. There is no need for exaggeration. The Journal Register Company is not in any grave peril. There would be no risk of insolvency, if the company did not borrow further, and committed its substantial free cash flow to paying down its debt.
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