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, Cinevista Limited (NSE:CINEVISTA) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Cinevista's Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Cinevista had debt of ₹523.0m, up from ₹462.9m in one year. And it doesn't have much cash, so its net debt is about the same.
How Strong Is Cinevista's Balance Sheet?
According to the last reported balance sheet, Cinevista had liabilities of ₹171.5m due within 12 months, and liabilities of ₹523.0m due beyond 12 months. On the other hand, it had cash of ₹2.09m and ₹94.0m worth of receivables due within a year. So its liabilities total ₹598.4m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of ₹996.5m, so it does suggest shareholders should keep an eye on Cinevista's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cinevista's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Cinevista had a loss before interest and tax, and actually shrunk its revenue by 96%, to ₹8.4m. To be frank that doesn't bode well.
Not only did Cinevista's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹96m 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. For example, we would not want to see a repeat of last year's loss of ₹95m. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Cinevista (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.
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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