We Think B.A.G. Films and Media (NSE:BAGFILMS) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, B.A.G. Films and Media Limited (NSE:BAGFILMS) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, B.A.G. Films and Media had ₹1.28b of debt at March 2021, down from ₹1.35b a year prior. On the flip side, it has ₹740.8m in cash leading to net debt of about ₹541.3m.

A Look At B.A.G. Films and Media's Liabilities

We can see from the most recent balance sheet that B.A.G. Films and Media had liabilities of ₹1.36b falling due within a year, and liabilities of ₹508.5m due beyond that. Offsetting this, it had ₹740.8m in cash and ₹543.8m in receivables that were due within 12 months. So it has liabilities totalling ₹584.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₹825.3m, so it does suggest shareholders should keep an eye on B.A.G. Films and Media's use of debt. 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 you can't view debt in total isolation; since B.A.G. Films and Media 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.

In the last year B.A.G. Films and Media had a loss before interest and tax, and actually shrunk its revenue by 17%, to ₹1.0b. We would much prefer see growth.

Caveat Emptor

Not only did B.A.G. Films and Media's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹41m at the EBIT level. 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 ₹210m in negative free cash flow over the last twelve months. So suffice it to say 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. We've identified 3 warning signs with B.A.G. Films and Media (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you’re looking to trade B.A.G. Films and Media, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.