Does Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chicken Soup for the Soul Entertainment

What Is Chicken Soup for the Soul Entertainment's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Chicken Soup for the Soul Entertainment had debt of US$49.0m, up from US$23.5m in one year. But it also has US$66.9m in cash to offset that, meaning it has US$18.0m net cash.

How Healthy Is Chicken Soup for the Soul Entertainment's Balance Sheet?

The latest balance sheet data shows that Chicken Soup for the Soul Entertainment had liabilities of US$50.8m due within a year, and liabilities of US$108.0m falling due after that. On the other hand, it had cash of US$66.9m and US$48.3m worth of receivables due within a year. So its liabilities total US$43.6m more than the combination of its cash and short-term receivables.

Chicken Soup for the Soul Entertainment has a market capitalization of US$177.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Chicken Soup for the Soul Entertainment 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 ultimately the future profitability of the business will decide if Chicken Soup for the Soul Entertainment 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 Chicken Soup for the Soul Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to US$95m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Chicken Soup for the Soul Entertainment?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Chicken Soup for the Soul Entertainment had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$32m and booked a US$47m accounting loss. With only US$18.0m 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, Chicken Soup for the Soul Entertainment may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Chicken Soup for the Soul Entertainment you should be aware of.

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.

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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.