David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Everyman Media Group plc (LON:EMAN) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Debt?
You can click the graphic below for the historical numbers, but it shows that Everyman Media Group had UK£9.04m of debt in December 2020, down from UK£14.1m, one year before. However, because it has a cash reserve of UK£328.0k, its net debt is less, at about UK£8.72m.
A Look At Everyman Media Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Everyman Media Group had liabilities of UK£12.2m due within 12 months and liabilities of UK£85.4m due beyond that. Offsetting these obligations, it had cash of UK£328.0k as well as receivables valued at UK£2.65m due within 12 months. So its liabilities total UK£94.6m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of UK£131.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Everyman Media Group made a loss at the EBIT level, and saw its revenue drop to UK£24m, which is a fall of 63%. That makes us nervous, to say the least.
While Everyman Media Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping UK£20m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£14m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Everyman Media Group is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...
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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