FansUnite Entertainment (TSE:FANS) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, FansUnite Entertainment Inc. (TSE:FANS) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for FansUnite Entertainment

How Much Debt Does FansUnite Entertainment Carry?

The image below, which you can click on for greater detail, shows that FansUnite Entertainment had debt of CA$2.47m at the end of March 2024, a reduction from CA$8.23m over a year. However, because it has a cash reserve of CA$1.38m, its net debt is less, at about CA$1.09m.

How Healthy Is FansUnite Entertainment's Balance Sheet?

According to the last reported balance sheet, FansUnite Entertainment had liabilities of CA$25.9m due within 12 months, and liabilities of CA$2.34m due beyond 12 months. Offsetting this, it had CA$1.38m in cash and CA$8.54m in receivables that were due within 12 months. So it has liabilities totalling CA$18.3m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CA$14.3m, we think shareholders really should watch FansUnite Entertainment's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is FansUnite Entertainment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year FansUnite Entertainment had a loss before interest and tax, and actually shrunk its revenue by 6.4%, to CA$25m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months FansUnite Entertainment produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$22m. Considering that alongside the liabilities mentioned above make us nervous 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 CA$373k over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with FansUnite Entertainment (including 3 which make us uncomfortable) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.