Is DEAG Deutsche Entertainment (HMSE:LOU) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that DEAG Deutsche Entertainment Aktiengesellschaft (HMSE:LOU) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for DEAG Deutsche Entertainment

What Is DEAG Deutsche Entertainment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 DEAG Deutsche Entertainment had €93.8m of debt, an increase on €71.1m, over one year. On the flip side, it has €68.8m in cash leading to net debt of about €25.0m.

How Healthy Is DEAG Deutsche Entertainment's Balance Sheet?

According to the last reported balance sheet, DEAG Deutsche Entertainment had liabilities of €188.8m due within 12 months, and liabilities of €97.2m due beyond 12 months. Offsetting these obligations, it had cash of €68.8m as well as receivables valued at €20.9m due within 12 months. So its liabilities total €196.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €96.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, DEAG Deutsche Entertainment would likely require a major re-capitalisation if it had to pay its creditors today. 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 DEAG Deutsche 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, DEAG Deutsche Entertainment reported revenue of €353m, which is a gain of 16%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months DEAG Deutsche Entertainment produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €11m. 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. For example, we would not want to see a repeat of last year's loss of €10m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for DEAG Deutsche Entertainment you should be aware of, and 1 of them shouldn't be ignored.

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.

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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.