Here's Why Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) Can Afford Some Debt

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.' 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. We note that Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 December 2021 Chicken Soup for the Soul Entertainment had debt of US$49.6m, up from US$33.6m in one year. However, it also had US$44.3m in cash, and so its net debt is US$5.28m.

A Look At Chicken Soup for the Soul Entertainment's Liabilities

Zooming in on the latest balance sheet data, we can see that Chicken Soup for the Soul Entertainment had liabilities of US$46.4m due within 12 months and liabilities of US$107.4m due beyond that. Offsetting these obligations, it had cash of US$44.3m as well as receivables valued at US$60.2m due within 12 months. So its liabilities total US$49.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Chicken Soup for the Soul Entertainment is worth US$126.5m, and thus could probably raise enough capital to shore up 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. 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 Chicken Soup for the Soul Entertainment's ability to maintain a healthy balance sheet going forward. 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 66%, to US$110m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Chicken Soup for the Soul Entertainment still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$34m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$32m of cash over the last year. So in short it's a really risky stock. 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.

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.