Is Cinedigm (NASDAQ:CIDM) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Cinedigm Corp. (NASDAQ:CIDM) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cinedigm

What Is Cinedigm's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Cinedigm had debt of US$3.62m, up from none in one year. But on the other hand it also has US$9.68m in cash, leading to a US$6.05m net cash position.

How Strong Is Cinedigm's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cinedigm had liabilities of US$55.6m due within 12 months and liabilities of US$6.83m due beyond that. Offsetting this, it had US$9.68m in cash and US$30.9m in receivables that were due within 12 months. So it has liabilities totalling US$21.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Cinedigm has a market capitalization of US$83.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Cinedigm boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cinedigm can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Cinedigm wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to US$59m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Cinedigm?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Cinedigm lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$12m of cash and made a loss of US$15m. With only US$6.05m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Cinedigm may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For instance, we've identified 3 warning signs for Cinedigm that you should be aware of.

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.