David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Mostly, Cinevista Limited (NSE: CINEVISTA) is in debt. But does this debt concern shareholders?
When Is Debt a Problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Cinevista
What is Cinevista’s debt?
The image below, which you can click for more details, shows that in March 2021, Cinevista had a debt of 523.0 million yen, up from 462.9 million yen in a year. And he doesn’t have a lot of cash, so his net debt is about the same.
How strong is Cinevista’s balance sheet?
According to the latest published balance sheet, Cinevista had a liability of 171.5 million yen due within 12 months and a liability of 523.0 million yen due beyond 12 months. On the other hand, it had cash of 2.09 million and 94.0 million in receivables within one year. His liabilities therefore total ₹ 598.4m more than the combination of his cash and short-term receivables.
This shortfall is sizable compared to its market capitalization of 996.5 million yen, so he suggests shareholders keep an eye on Cinevista’s use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is Cinevista’s profits that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over the past year, Cinevista has recorded a loss before interest and taxes and actually reduced its revenue by 96%, to 8.4 million yen. To be frank, that doesn’t bode well.
Not only has Cinevista’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Indeed, it lost 96 million euros at the EBIT level. Considering that alongside the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we think the record is far from up to par, although it could improve over time. For example, we wouldn’t want to see a repeat of last year’s 95 million yen loss. So, to be frank, we think it’s risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 4 warning signs with Cinevista (at least 2 that shouldn’t be ignored), and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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