Does Dolphin Entertainment (NASDAQ:DLPN) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Dolphin Entertainment, Inc. (NASDAQ:DLPN) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dolphin Entertainment

How Much Debt Does Dolphin Entertainment Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Dolphin Entertainment had US$20.9m of debt, an increase on US$15.8m, over one year. However, it also had US$8.72m in cash, and so its net debt is US$12.2m.

How Healthy Is Dolphin Entertainment's Balance Sheet?

We can see from the most recent balance sheet that Dolphin Entertainment had liabilities of US$26.0m falling due within a year, and liabilities of US$19.1m due beyond that. Offsetting these obligations, it had cash of US$8.72m as well as receivables valued at US$13.3m due within 12 months. So its liabilities total US$23.1m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$15.8m, we think shareholders really should watch Dolphin Entertainment's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dolphin 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 Dolphin Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$49m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Dolphin Entertainment produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$3.3m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$871k over the last twelve months. That means it's on the risky side of things. 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. Case in point: We've spotted 3 warning signs for Dolphin Entertainment you should be aware of, and 1 of them doesn't sit too well with us.

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.