Is Dolphin Entertainment (NASDAQ:DLPN) Using Too Much Debt?

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. We can see that Dolphin Entertainment, Inc. (NASDAQ:DLPN) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dolphin Entertainment

What Is Dolphin Entertainment's Net Debt?

As you can see below, Dolphin Entertainment had US$8.93m of debt at September 2020, down from US$11.4m a year prior. However, it does have US$9.21m in cash offsetting this, leading to net cash of US$278.6k.

How Strong Is Dolphin Entertainment's Balance Sheet?

According to the last reported balance sheet, Dolphin Entertainment had liabilities of US$17.0m due within 12 months, and liabilities of US$13.8m due beyond 12 months. Offsetting these obligations, it had cash of US$9.21m as well as receivables valued at US$4.42m due within 12 months. So its liabilities total US$17.2m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Dolphin Entertainment has a market capitalization of US$32.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Dolphin Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dolphin 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.

In the last year Dolphin Entertainment's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

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$1.4m of cash and made a loss of US$1.5m. Given it only has net cash of US$278.6k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Dolphin Entertainment is showing 3 warning signs in our investment analysis , and 1 of those is significant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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