Wednesday, Lions Gate (NYSE:LGF) announced it is interested in keeping the hooded Kenny character alive in its own neighborhood, agreeing to acquire South Park's distributor, Debmar-Mercury LLC. The move should be a good fit because it combines two firms known for their entrepreneurial spirit and adds another potential growth platform.

Lions Gate has had an impressive run of releasing critically acclaimed, smaller-budget films, such as this year's best picture winner at the Academy Awards, Crash, but its stock has yet to attain mass-market appeal and financial success. That's similar to what's been happening at Time Warner -- both companies have released hit pictures (such as the recent record-breaking Superman Returns), but both stocks have been floundering. What will it take for Lions Gate's stock to finally be discovered?

I'll refer you to fellow Fool Stephen Ellis' full take on Lions Gate's potential appeal, where he hit on the key investment merits, which include a valuable 8,000-film library that is among the largest in Hollywood and throws off stable, annual cash flow in the form of DVD sales and revenue from cable and network channel firms. There's also a decent track record of releasing more movie hits than misses and a television production unit with a couple of relatively well-known programs including The Dead Zone, which happened to be distributed by Debmar-Mercury.

Stephen also recapped fiscal 2006 financial results, highlighting the fact that earnings for film companies tend to fluctuate considerably because the movie business is subject to the whims of moviegoers, who have the final say in what constitutes a blockbuster versus a flop. Few media firms, barring Disney's (NYSE:DIS) recently acquired Pixar animation studios, have been able to consistently churn out home-run films, especially because the average cost of producing and marketing a hit is about $100 million. Lions Gate's budget for each motion picture is much more modest at closer to $20 million, but that also means the target audience is much smaller for the 15 to 18 movies it releases annually.

Overall, sales have grown an impressive 30% on average each year over the past five years, but earnings have been volatile, at times falling into negative territory. We know that this is a norm in the business, but a bigger drawback is that Lions Gate's debt level is quite high at about 72% of total capital. Anything over 50% tends to worry me because any adverse development could make it very difficult to cover interest expense, which is clearly significant for Lions Gate. The riskier, high debt load is in contrast to management's conservative approach to releasing movies, and while the terms of the Debmar-Mercury transaction weren't readily available, the move could increase debt even more.

Barring a major loss in fiscal 2004 and subsequent negative free cash flow, free cash has been impressive over the past two years, coming in at about $1.00 per share for fiscal 2006 (the shares recently traded at around $8.60). For those familiar with the concept of earnings yield, which is simply the inverse of price to free cash flow, around 12% is an impressive figure for any company, and it would have been even higher had it not been for an unshareholder-friendly 45% jump in diluted shares outstanding back in 2005.

I was a bit more optimistic about the stock before diving further into the financials, especially because financial publication Barron's just issued a favorable write-up on Lions Gate. I realize the media business does fluctuate considerably, and Lions Gate has some takeover appeal, as witnessed by activist shareholder Carl Icahn's 4% holding in the company. But other media firms, such as IMAX (NASDAQ:IMAX), also have takeover appeal and attractive assets. It's a close call, but because of high debt levels and a spotty track record of free cash flow, right now I'll use my $8.60 for a movie ticket instead of a share of Lions Gate.

Time Warner and Disney are Stock Advisor recommendations, and IMAX is a Rule Breakers pick. What other stocks are at the top of our advisors' lists? Be our guest for 30 days and find out.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.