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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Sambhaav Media Limited (NSE:SAMBHAAV) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sambhaav Media

How Much Debt Does Sambhaav Media Carry?

As you can see below, Sambhaav Media had ₹165.2m of debt at September 2023, down from ₹185.8m a year prior. However, it does have ₹9.36m in cash offsetting this, leading to net debt of about ₹155.8m.

How Healthy Is Sambhaav Media's Balance Sheet?

We can see from the most recent balance sheet that Sambhaav Media had liabilities of ₹125.8m falling due within a year, and liabilities of ₹84.0m due beyond that. On the other hand, it had cash of ₹9.36m and ₹191.5m worth of receivables due within a year. So its liabilities total ₹8.94m 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 while it's hard to imagine that the ₹1.03b 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 you can't view debt in total isolation; since Sambhaav Media will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sambhaav Media made a loss at the EBIT level, and saw its revenue drop to ₹384m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Sambhaav 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 ₹20m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹25m into a profit. In the meantime, we consider the stock very 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. Case in point: We've spotted 4 warning signs for Sambhaav Media you should be aware of, and 2 of them 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.