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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Dolphin Entertainment, Inc. (NASDAQ:DLPN) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dolphin Entertainment

What Is Dolphin Entertainment's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Dolphin Entertainment had debt of US$20.7m, up from US$19.2m in one year. However, it does have US$5.66m in cash offsetting this, leading to net debt of about US$15.0m.

How Strong Is Dolphin Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dolphin Entertainment had liabilities of US$24.8m due within 12 months and liabilities of US$18.9m due beyond that. Offsetting this, it had US$5.66m in cash and US$11.7m in receivables that were due within 12 months. So it has liabilities totalling US$26.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$12.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Dolphin Entertainment would likely require a major re-capitalisation if it had to pay its creditors today. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Dolphin Entertainment reported revenue of US$51m, which is a gain of 22%, 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, Dolphin Entertainment still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$1.8m. 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 burned through US$741k in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. For example - Dolphin Entertainment has 2 warning signs we think you should be aware of.

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.