Does Sambhaav Media (NSE:SAMBHAAV) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Sambhaav Media Limited (NSE:SAMBHAAV) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sambhaav Media

What Is Sambhaav Media's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Sambhaav Media had debt of ₹189.2m, up from ₹150.0m in one year. However, because it has a cash reserve of ₹9.43m, its net debt is less, at about ₹179.7m.

How Healthy Is Sambhaav Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sambhaav Media had liabilities of ₹148.8m due within 12 months and liabilities of ₹99.5m due beyond that. On the other hand, it had cash of ₹9.43m and ₹228.8m worth of receivables due within a year. So it has liabilities totalling ₹9.97m more than its cash and near-term receivables, combined.

Having regard to Sambhaav Media's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹663.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sambhaav 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.

In the last year Sambhaav Media had a loss before interest and tax, and actually shrunk its revenue by 17%, to ₹373m. We would much prefer see growth.

Caveat Emptor

Not only did Sambhaav Media's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹38m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 ₹37m 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. To that end, you should learn about the 4 warning signs we've spotted with Sambhaav Media (including 3 which don't sit too well with us) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.