Wed. Sep 28th, 2022

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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. We note that Dolphin Entertainment, Inc. (NASDAQ:DLPN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Dolphin Entertainment

What Is Dolphin Entertainment’s Debt?

The image below, which you can click on for greater detail, shows that Dolphin Entertainment had debt of US$5.67m at the end of March 2022, a reduction from US$7.71m over a year. But it also has US$9.62m in cash to offset that, meaning it has US$3.96m net cash.

debt-equity-history-analysis

debt-equity-history-analysis

How Healthy Is Dolphin Entertainment’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dolphin Entertainment had liabilities of US$16.1m due within 12 months and liabilities of US$13.4m due beyond that. Offsetting these obligations, it had cash of US$9.62m as well as receivables valued at US$8.28m due within 12 months. So it has liabilities totalling US$11.5m more than its cash and near-term receivables, combined.

This deficit isn’t so bad because Dolphin Entertainment is worth US$41.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 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 53%, to US$38m. 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 in the last year Dolphin Entertainment had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$466k and booked a US$2.0m accounting loss. With only US$3.96m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Dolphin Entertainment may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we’ve spotted 2 warning signs for Dolphin Entertainment you should know about.

At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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