Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that ARHT Media Inc. (CVE:ART) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for ARHT Media
How Much Debt Does ARHT Media Carry?
As you can see below, at the end of September 2023, ARHT Media had CA$2.12m of debt, up from CA$40.0k a year ago. Click the image for more detail. However, because it has a cash reserve of CA$517.0k, its net debt is less, at about CA$1.60m.
A Look At ARHT Media's Liabilities
We can see from the most recent balance sheet that ARHT Media had liabilities of CA$3.58m falling due within a year, and liabilities of CA$2.18m due beyond that. Offsetting these obligations, it had cash of CA$517.0k as well as receivables valued at CA$2.27m due within 12 months. So its liabilities total CA$2.98m more than the combination of its cash and short-term receivables.
Since publicly traded ARHT Media shares are worth a total of CA$17.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ARHT Media's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year ARHT Media's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Over the last twelve months ARHT Media produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$11m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$7.7m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for ARHT Media (1 shouldn't be ignored) you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About TSXV:ART.H
Medium-low and slightly overvalued.
