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. As with many other companies Everyman Media Group plc (LON:EMAN) makes use of debt. But is this debt a concern to shareholders?
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. 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. 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.
What Is Everyman Media Group's Net Debt?
The image below, which you can click on for greater detail, shows that Everyman Media Group had debt of UK£10.1m at the end of July 2020, a reduction from UK£11.1m over a year. However, it does have UK£5.66m in cash offsetting this, leading to net debt of about UK£4.40m.
A Look At Everyman Media Group's Liabilities
The latest balance sheet data shows that Everyman Media Group had liabilities of UK£14.6m due within a year, and liabilities of UK£83.3m falling due after that. Offsetting this, it had UK£5.66m in cash and UK£3.69m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£88.6m.
Given this deficit is actually higher than the company's market capitalization of UK£69.2m, we think shareholders really should watch Everyman Media Group'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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Everyman Media Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Everyman Media Group made a loss at the EBIT level, and saw its revenue drop to UK£51m, which is a fall of 8.6%. We would much prefer see growth.
Over the last twelve months Everyman Media Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost UK£3.4m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through UK£13m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Everyman Media Group has 4 warning signs (and 1 which is concerning) we think you should know about.
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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