Is FansUnite Entertainment (TSE:FANS) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, FansUnite Entertainment Inc. (TSE:FANS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, 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 June 2023 FansUnite Entertainment had CA$2.72m of debt, an increase on CA$47.5k, over one year. But on the other hand it also has CA$3.46m in cash, leading to a CA$743.0k net cash position.

How Healthy Is FansUnite Entertainment's Balance Sheet?

We can see from the most recent balance sheet that FansUnite Entertainment had liabilities of CA$18.9m falling due within a year, and liabilities of CA$7.18m due beyond that. Offsetting these obligations, it had cash of CA$3.46m as well as receivables valued at CA$6.22m due within 12 months. So its liabilities total CA$16.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$17.9m, so it does suggest shareholders should keep an eye on FansUnite Entertainment's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, FansUnite Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is FansUnite Entertainment's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year FansUnite Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to CA$27m. With any luck the company will be able to grow its way to profitability.

So How Risky Is FansUnite Entertainment?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months FansUnite Entertainment lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$1.5m and booked a CA$47m accounting loss. With only CA$743.0k on the balance sheet, it would appear that its going to need to raise capital again soon. FansUnite Entertainment's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with FansUnite Entertainment (at least 3 which can't be ignored) , and understanding them should be part of your investment process.

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.

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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.