Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. As with many other companies Gaming Realms plc (LON:GMR) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Gaming Realms
How Much Debt Does Gaming Realms Carry?
The chart below, which you can click on for greater detail, shows that Gaming Realms had UK£3.80m in debt in June 2019; about the same as the year before. However, it does have UK£277.5k in cash offsetting this, leading to net debt of about UK£3.52m.
How Healthy Is Gaming Realms’s Balance Sheet?
According to the last reported balance sheet, Gaming Realms had liabilities of UK£8.83m due within 12 months, and liabilities of UK£3.78m due beyond 12 months. On the other hand, it had cash of UK£277.5k and UK£1.17m worth of receivables due within a year. So it has liabilities totalling UK£11.2m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of UK£17.9m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gaming Realms 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.
While it hasn’t made a profit, at least Gaming Realms booked its first revenue as a publicly listed company, in the last twelve months.
Caveat Emptor
Over the last twelve months Gaming Realms produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable UK£3.5m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled UK£4.6m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Gaming Realms insider transactions.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.