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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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Cineline India Limited (NSE:CINELINE) does use debt in its business. But the real question is whether this debt is making the company risky.
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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Cineline India
What Is Cineline India's Net Debt?
As you can see below, at the end of March 2019, Cineline India had ₹1.59b of debt, up from ₹1.24b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹221.5m, its net debt is less, at about ₹1.37b.
A Look At Cineline India's Liabilities
According to the last reported balance sheet, Cineline India had liabilities of ₹56.5m due within 12 months, and liabilities of ₹1.68b due beyond 12 months. Offsetting this, it had ₹221.5m in cash and ₹28.6m in receivables that were due within 12 months. So its liabilities total ₹1.49b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the ₹932.4m 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'd watch its balance sheet closely, without a doubt At the end of the day, Cineline India would probably need a major re-capitalization if its creditors were to demand repayment.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).