We Think Chicken Soup for the Soul Entertainment (NASDAQ:CSSE) Has A Fair Chunk Of 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 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 A Problem?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Chicken Soup for the Soul Entertainment

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

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Chicken Soup for the Soul Entertainment had US$69.0m of debt, an increase on US$48.9m, over one year. On the flip side, it has US$23.0m in cash leading to net debt of about US$46.0m.

How Healthy 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$60.8m due within 12 months and liabilities of US$186.6m due beyond that. Offsetting this, it had US$23.0m in cash and US$67.5m in receivables that were due within 12 months. So its liabilities total US$156.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$193.7m, so it does suggest shareholders should keep an eye on Chicken Soup for the Soul Entertainment's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Chicken Soup for the Soul Entertainment reported revenue of US$132m, which is a gain of 55%, although it did not report any earnings before interest and tax. 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. Indeed, it lost a very considerable US$48m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$39m in negative free cash flow over the last twelve months. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Chicken Soup for the Soul Entertainment you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.