Is Cinevista (NSE:CINEVISTA) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Cinevista Limited (NSE:CINEVISTA) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cinevista

How Much Debt Does Cinevista Carry?

As you can see below, at the end of September 2020, Cinevista had ₹519.0m of debt, up from ₹462.9m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

A Look At Cinevista's Liabilities

We can see from the most recent balance sheet that Cinevista had liabilities of ₹184.4m falling due within a year, and liabilities of ₹519.0m due beyond that. On the other hand, it had cash of ₹4.60m and ₹95.8m worth of receivables due within a year. So it has liabilities totalling ₹603.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹361.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Cinevista would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cinevista 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, Cinevista made a loss at the EBIT level, and saw its revenue drop to ₹60m, which is a fall of 78%. That makes us nervous, to say the least.

Caveat Emptor

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 ₹23m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₹62m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Cinevista is showing 4 warning signs in our investment analysis , and 3 of those are concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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