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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that B.A.G. Films and Media Limited (NSE:BAGFILMS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for B.A.G. Films and Media

What Is B.A.G. Films and Media's Net Debt?

You can click the graphic below for the historical numbers, but it shows that B.A.G. Films and Media had ₹1.28b of debt in September 2020, down from ₹1.34b, one year before. However, because it has a cash reserve of ₹798.2m, its net debt is less, at about ₹486.3m.

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

We can see from the most recent balance sheet that B.A.G. Films and Media had liabilities of ₹1.39b falling due within a year, and liabilities of ₹496.3m due beyond that. Offsetting this, it had ₹798.2m in cash and ₹474.8m in receivables that were due within 12 months. So it has liabilities totalling ₹614.7m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹623.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is B.A.G. Films and Media's earnings that will influence how the balance sheet holds up in the future. 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, B.A.G. Films and Media made a loss at the EBIT level, and saw its revenue drop to ₹890m, which is a fall of 39%. To be frank that doesn't bode well.

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. Its EBIT loss was a whopping ₹122m. 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. We would feel better if it turned its trailing twelve month loss of ₹180m into a profit. In the meantime, we consider the stock very risky. 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. Take risks, for example - B.A.G. Films and Media has 3 warning signs (and 2 which are concerning) we think you should know about.

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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