Don't Nod Entertainment (EPA:ALDNE) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Don't Nod Entertainment S.A. (EPA:ALDNE) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Don't Nod Entertainment

What Is Don't Nod Entertainment's Net Debt?

As you can see below, Don't Nod Entertainment had €3.70m of debt at June 2021, down from €4.18m a year prior. But it also has €62.9m in cash to offset that, meaning it has €59.2m net cash.

How Healthy Is Don't Nod Entertainment's Balance Sheet?

According to the last reported balance sheet, Don't Nod Entertainment had liabilities of €4.56m due within 12 months, and liabilities of €6.98m due beyond 12 months. Offsetting this, it had €62.9m in cash and €9.06m in receivables that were due within 12 months. So it can boast €60.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Don't Nod Entertainment's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Don't Nod Entertainment has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Don't Nod Entertainment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Don't Nod Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to €26m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Don't Nod Entertainment?

Although Don't Nod Entertainment had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €637k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Keeping in mind its 29% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Don't Nod Entertainment has 2 warning signs we think you should be aware of.

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.