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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies FansUnite Entertainment Inc. (TSE:FANS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at 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 as of September 2022 FansUnite Entertainment had CA$8.23m of debt, an increase on CA$78.2k, over one year. However, it does have CA$4.58m in cash offsetting this, leading to net debt of about CA$3.66m.

How Strong Is FansUnite Entertainment's Balance Sheet?

We can see from the most recent balance sheet that FansUnite Entertainment had liabilities of CA$13.4m falling due within a year, and liabilities of CA$30.9m due beyond that. Offsetting these obligations, it had cash of CA$4.58m as well as receivables valued at CA$4.49m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$35.3m.

The deficiency here weighs heavily on the CA$22.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, FansUnite Entertainment would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, FansUnite Entertainment reported revenue of CA$23m, which is a gain of 582%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, FansUnite Entertainment still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$36m. When we look at that alongside the significant liabilities, we're not particularly confident 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$7.8m 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. Be aware that FansUnite Entertainment is showing 4 warning signs in our investment analysis , and 2 of those don't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.