11 bit studios (WSE:11B) Has A Rock Solid Balance Sheet

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.' 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, 11 bit studios S.A. (WSE:11B) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 11 bit studios

What Is 11 bit studios's Net Debt?

The image below, which you can click on for greater detail, shows that 11 bit studios had debt of zł11.3m at the end of September 2020, a reduction from zł12.1m over a year. But it also has zł108.3m in cash to offset that, meaning it has zł97.0m net cash.

How Healthy Is 11 bit studios' Balance Sheet?

We can see from the most recent balance sheet that 11 bit studios had liabilities of zł17.4m falling due within a year, and liabilities of zł10.9m due beyond that. On the other hand, it had cash of zł108.3m and zł13.5m worth of receivables due within a year. So it actually has zł93.5m more liquid assets than total liabilities.

This short term liquidity is a sign that 11 bit studios could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, 11 bit studios boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, 11 bit studios grew its EBIT by 102% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 11 bit studios can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 11 bit studios may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, 11 bit studios recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that 11 bit studios has net cash of zł97.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 102% year-on-year EBIT growth. So is 11 bit studios's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that 11 bit studios is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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