Is Cinedigm (NASDAQ:CIDM) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Cinedigm Corp. (NASDAQ:CIDM) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cinedigm

What Is Cinedigm's Net Debt?

As you can see below, at the end of December 2022, Cinedigm had US$4.87m of debt, up from none a year ago. Click the image for more detail. However, it does have US$8.80m in cash offsetting this, leading to net cash of US$3.93m.

How Strong Is Cinedigm's Balance Sheet?

We can see from the most recent balance sheet that Cinedigm had liabilities of US$50.7m falling due within a year, and liabilities of US$6.50m due beyond that. Offsetting this, it had US$8.80m in cash and US$32.8m in receivables that were due within 12 months. So it has liabilities totalling US$15.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Cinedigm is worth US$61.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Cinedigm also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Cinedigm's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Cinedigm wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to US$72m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Cinedigm?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Cinedigm had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$8.5m of cash and made a loss of US$9.5m. Given it only has net cash of US$3.93m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Cinedigm may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 2 warning signs with Cinedigm , and understanding them should be part of your investment process.

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.