Is Sambhaav Media (NSE:SAMBHAAV) A Risky Investment?

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.' 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. As with many other companies Sambhaav Media Limited (NSE:SAMBHAAV) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sambhaav Media

What Is Sambhaav Media's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Sambhaav Media had ₹166.7m of debt, an increase on ₹131.5m, over one year. However, it does have ₹13.2m in cash offsetting this, leading to net debt of about ₹153.4m.

How Strong Is Sambhaav Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sambhaav Media had liabilities of ₹217.4m due within 12 months and liabilities of ₹129.4m due beyond that. Offsetting this, it had ₹13.2m in cash and ₹323.5m in receivables that were due within 12 months. So its liabilities total ₹9.99m more than the combination of its cash and short-term receivables.

Having regard to Sambhaav Media's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹523.6m company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sambhaav Media 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, Sambhaav Media made a loss at the EBIT level, and saw its revenue drop to ₹422m, which is a fall of 14%. That's not what we would hope to see.

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). Its EBIT loss was a whopping ₹55m. 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. Another cause for caution is that is bled ₹29m 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Sambhaav Media (of which 2 don't sit too well with us!) you should know about.

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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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.
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