Is SD ENTERTAINMENTInc (TYO:4650) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, SD ENTERTAINMENT,Inc. (TYO:4650) does carry debt. But is this debt a concern to shareholders?

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. 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. 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. 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 SD ENTERTAINMENTInc

How Much Debt Does SD ENTERTAINMENTInc Carry?

The chart below, which you can click on for greater detail, shows that SD ENTERTAINMENTInc had JP¥3.79b in debt in September 2020; about the same as the year before. However, it also had JP¥809.0m in cash, and so its net debt is JP¥2.98b.

A Look At SD ENTERTAINMENTInc's Liabilities

According to the last reported balance sheet, SD ENTERTAINMENTInc had liabilities of JP¥2.82b due within 12 months, and liabilities of JP¥2.21b due beyond 12 months. Offsetting this, it had JP¥809.0m in cash and JP¥225.0m in receivables that were due within 12 months. So it has liabilities totalling JP¥4.00b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's JP¥3.66b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 SD ENTERTAINMENTInc 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.

In the last year SD ENTERTAINMENTInc had a loss before interest and tax, and actually shrunk its revenue by 24%, to JP¥4.0b. That makes us nervous, to say the least.

Caveat Emptor

While SD ENTERTAINMENTInc'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 JP¥74m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of JP¥330m didn't encourage us either; we'd like to see a profit. 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 SD ENTERTAINMENTInc is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

When trading SD ENTERTAINMENTInc or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.