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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. 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. Importantly, Dolphin Entertainment, Inc. (NASDAQ:DLPN) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Dolphin Entertainment's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Dolphin Entertainment had US$9.21m of debt, an increase on US$7.22m, over one year. On the flip side, it has US$2.56m in cash leading to net debt of about US$6.65m.
A Look At Dolphin Entertainment's Liabilities
We can see from the most recent balance sheet that Dolphin Entertainment had liabilities of US$22.5m falling due within a year, and liabilities of US$8.56m due beyond that. Offsetting this, it had US$2.56m in cash and US$2.60m in receivables that were due within 12 months. So its liabilities total US$25.9m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$11.7m company, like a colossus towering over mere mortals. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 had negative earnings before interest and tax, and actually shrunk its revenue by 3.6%, to US$24m. That's not what we would hope to see.
Over the last twelve months Dolphin Entertainment produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$4.1m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$2.0m over the last twelve months. So suffice it to say we consider the stock to be risky. For riskier companies like Dolphin Entertainment I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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