Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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. We can see that Chicken Soup for the Soul Entertainment, Inc. (NASDAQ:CSSE) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Chicken Soup for the Soul Entertainment
What Is Chicken Soup for the Soul Entertainment’s Debt?
As you can see below, at the end of September 2020, Chicken Soup for the Soul Entertainment had US$23.5m of debt, up from US$15.8m a year ago. Click the image for more detail. However, it also had US$9.24m in cash, and so its net debt is US$14.3m.
How Healthy Is Chicken Soup for the Soul Entertainment’s Balance Sheet?
The latest balance sheet data shows that Chicken Soup for the Soul Entertainment had liabilities of US$31.4m due within a year, and liabilities of US$62.9m falling due after that. On the other hand, it had cash of US$9.24m and US$30.9m worth of receivables due within a year. So its liabilities total US$54.3m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Chicken Soup for the Soul Entertainment has a market capitalization of US$224.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 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$71m, which is a gain of 65%, 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.
While we can certainly appreciate Chicken Soup for the Soul Entertainment’s revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$45m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through US$19m of cash over the last year. 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. To that end, you should be aware of the 4 warning signs we’ve spotted with Chicken Soup for the Soul Entertainment .
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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