Entertainment One’s (LSE: ETO) shares have been on a wild ride this week. On Monday, the shares lost 14%. On Tuesday, the company’s shares slumped 21% but today, the shares are rallying and have gained 11.4% at time of writing.
Entertainment One is rising today after the company’s management attempted to reassure shareholders this morning. In a trading update, management announced that the group “continues to trade in line” with full-year earnings expectations. What’s more, the trading update reassured investors that the company “continues to have confidence in its target of doubling the size of the business by 2020, with strong organic growth and carefully targeted acquisitions”.
Alongside this positive statement, Entertainment One announced that Darren Throop, chief executive had spent £183,000 buying just under 140,000 shares in the company during Tuesday’s carnage.
However, while the director dealing and upbeat trading statement from Entertainment One have been received well by the market, they fail to address the underlying concerns that have weighed on the group’s shares for the last six months.
Specifically, the market is concerned about Entertainment One’s lack of a “stable and predictable passage of trading”. In other words, while the group has had some success with its children’s animation Peppa Pig, and the distribution of zombie drama Fear the Walking Dead, the group is struggling to generate long-term sustainable growth. Granted, City analysts expect Entertainment One’s revenue to increase 3.4% year-on-year to £813m for the year ending 31/03/2016, but this is still 1.2% below the sales figure of £823m reported two years ago.
A more concerning metric is Entertainment One’s rising cost of debt. The company announced on Friday that it is raising in £285m in new debt to replace existing facilities. This new seven-year debt will have an interest rate of 6.9%. Entertainment One’s current debt has an interest rate of only 4.3%. The higher cost of debt could be a reflection of wider market trends, or it could indicate that debt investors don’t trust the company’s financial projections.
Whatever the case, it’s clear that debt investors are now more cautious about lending to Entertainment One than they have been in the past and it’s easy to see why. According to credit rating agency Moody’s, at the end of the first quarter Entertainment One’s adjusted gross debt was about three-and-a-half times earnings before interest, taxation, depreciation and amortisation (EBITDA). A debt to EBITDA ratio of more than two is usually considered to be a cause for concern. The company’s financing costs nearly doubled in the six months to September.
The bottom line
So overall, Darren Throop may be willing to put his money where his mouth is and back Entertainment One, but if you don’t already own the company’s shares, it might be wise to stay away. With debt increasing and no clear path for growth, Entertainment One is hardly a top pick for me.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.