Is Future Gaming Group International (NGM:FGG) Using Too Much Debt?

By
Simply Wall St
Published
April 11, 2022
NGM:FGG
Source: Shutterstock

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.' 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, Future Gaming Group International AB (publ) (NGM:FGG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Future Gaming Group International

How Much Debt Does Future Gaming Group International Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Future Gaming Group International had kr130.9m of debt, an increase on kr122.9m, over one year. However, because it has a cash reserve of kr12.4m, its net debt is less, at about kr118.5m.

debt-equity-history-analysis
NGM:FGG Debt to Equity History April 11th 2022

How Healthy Is Future Gaming Group International's Balance Sheet?

According to the last reported balance sheet, Future Gaming Group International had liabilities of kr134.4m due within 12 months, and liabilities of kr185.0k due beyond 12 months. Offsetting this, it had kr12.4m in cash and kr2.69m in receivables that were due within 12 months. So its liabilities total kr119.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the kr33.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Future Gaming Group International would probably need a major re-capitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.084 times and a disturbingly high net debt to EBITDA ratio of 58.7 hit our confidence in Future Gaming Group International like a one-two punch to the gut. The debt burden here is substantial. Even worse, Future Gaming Group International saw its EBIT tank 86% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. When analysing debt levels, the balance sheet is the obvious place to start. But it is Future Gaming Group International's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Future Gaming Group International burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Future Gaming Group International's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And even its interest cover fails to inspire much confidence. It looks to us like Future Gaming Group International carries a significant balance sheet burden. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. 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. Case in point: We've spotted 4 warning signs for Future Gaming Group International you should be aware of, and 2 of them make us uncomfortable.

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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