Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Dolphin Entertainment, Inc. (NASDAQ:DLPN) makes use of 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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Dolphin Entertainment's Net Debt?
As you can see below, Dolphin Entertainment had US$9.22m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$12.7m in cash to offset that, meaning it has US$3.44m net cash.
A Look At Dolphin Entertainment's Liabilities
Zooming in on the latest balance sheet data, we can see that Dolphin Entertainment had liabilities of US$15.4m due within 12 months and liabilities of US$15.2m due beyond that. Offsetting these obligations, it had cash of US$12.7m as well as receivables valued at US$6.23m due within 12 months. So it has liabilities totalling US$11.7m more than its cash and near-term receivables, combined.
Dolphin Entertainment has a market capitalization of US$34.9m, 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, Dolphin Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 34%, to US$32m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Dolphin Entertainment?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Dolphin Entertainment had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$444k of cash and made a loss of US$4.7m. With only US$3.44m on the balance sheet, it would appear that its going to need to raise capital again soon. Dolphin Entertainment's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Dolphin Entertainment is showing 3 warning signs in our investment analysis , you should know about...
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.
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.