Health Check: How Prudently Does Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) Use Debt?

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 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, 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Chicken Soup for the Soul Entertainment

How Much Debt Does Chicken Soup for the Soul Entertainment Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Chicken Soup for the Soul Entertainment had debt of US$463.9m, up from US$49.0m in one year. However, it also had US$32.2m in cash, and so its net debt is US$431.7m.

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

Zooming in on the latest balance sheet data, we can see that Chicken Soup for the Soul Entertainment had liabilities of US$141.3m due within 12 months and liabilities of US$650.8m due beyond that. Offsetting these obligations, it had cash of US$32.2m as well as receivables valued at US$96.1m due within 12 months. So its liabilities total US$663.8m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$130.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Chicken Soup for the Soul Entertainment would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chicken Soup for the Soul Entertainment'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 Chicken Soup for the Soul Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 85%, to US$175m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Chicken Soup for the Soul Entertainment managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$60m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through US$62m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For instance, we've identified 2 warning signs for Chicken Soup for the Soul Entertainment that 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.