Is Eros International Media (NSE:EROSMEDIA) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Eros International Media Limited (NSE:EROSMEDIA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Eros International Media

What Is Eros International Media's Debt?

The chart below, which you can click on for greater detail, shows that Eros International Media had ₹4.83b in debt in September 2021; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

A Look At Eros International Media's Liabilities

Zooming in on the latest balance sheet data, we can see that Eros International Media had liabilities of ₹10.4b due within 12 months and liabilities of ₹3.05b due beyond that. Offsetting these obligations, it had cash of ₹93.0m as well as receivables valued at ₹4.73b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹8.59b.

This deficit casts a shadow over the ₹2.03b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Eros International Media would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Eros International Media'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.

Over 12 months, Eros International Media made a loss at the EBIT level, and saw its revenue drop to ₹2.6b, which is a fall of 51%. That makes us nervous, to say the least.

Caveat Emptor

While Eros International 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. Indeed, it lost a very considerable ₹1.2b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹2.0b in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Eros International Media (of which 1 is concerning!) you should know about.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.