Is FansUnite Entertainment (TSE:FANS) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 FansUnite Entertainment Inc. (TSE:FANS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for FansUnite Entertainment

What Is FansUnite Entertainment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that FansUnite Entertainment had CA$2.72m of debt in September 2023, down from CA$8.23m, one year before. However, because it has a cash reserve of CA$2.29m, its net debt is less, at about CA$429.0k.

A Look At FansUnite Entertainment's Liabilities

According to the last reported balance sheet, FansUnite Entertainment had liabilities of CA$23.6m due within 12 months, and liabilities of CA$3.07m due beyond 12 months. Offsetting these obligations, it had cash of CA$2.29m as well as receivables valued at CA$6.27m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$18.1m.

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. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since FansUnite Entertainment will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, FansUnite Entertainment reported revenue of CA$27m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate FansUnite Entertainment's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CA$30m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$1.1m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example FansUnite Entertainment has 5 warning signs (and 3 which make us uncomfortable) we think you should know about.

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.

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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.