Does B.A.G. Films and Media (NSE:BAGFILMS) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that B.A.G. Films and Media Limited (NSE:BAGFILMS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for B.A.G. Films and Media

How Much Debt Does B.A.G. Films and Media Carry?

The image below, which you can click on for greater detail, shows that B.A.G. Films and Media had debt of ₹1.30b at the end of March 2020, a reduction from ₹1.36b over a year. However, because it has a cash reserve of ₹761.1m, its net debt is less, at about ₹539.1m.

How Healthy Is B.A.G. Films and Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that B.A.G. Films and Media had liabilities of ₹1.43b due within 12 months and liabilities of ₹508.7m due beyond that. Offsetting this, it had ₹761.1m in cash and ₹594.4m in receivables that were due within 12 months. So it has liabilities totalling ₹581.2m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₹514.1m, we think shareholders really should watch B.A.G. Films and Media'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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is B.A.G. Films and Media's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, B.A.G. Films and Media made a loss at the EBIT level, and saw its revenue drop to ₹1.2b, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While B.A.G. Films and Media's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹5.8m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₹91.3m. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for B.A.G. Films and Media (1 makes us a bit uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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