Playgon Games (CVE:DEAL) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Playgon Games Inc. (CVE:DEAL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, 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.

See our latest analysis for Playgon Games

How Much Debt Does Playgon Games Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Playgon Games had CA$2.03m of debt, an increase on none, over one year. However, its balance sheet shows it holds CA$2.86m in cash, so it actually has CA$831.6k net cash.

How Strong Is Playgon Games' Balance Sheet?

According to the last reported balance sheet, Playgon Games had liabilities of CA$3.29m due within 12 months, and liabilities of CA$1.29m due beyond 12 months. Offsetting this, it had CA$2.86m in cash and CA$177.4k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.55m.

This state of affairs indicates that Playgon Games' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$81.1m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Playgon Games boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Playgon Games'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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Playgon Games can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Playgon Games?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Playgon Games had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$3.0m of cash and made a loss of CA$5.2m. With only CA$831.6k on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Playgon Games is showing 6 warning signs in our investment analysis , and 4 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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