Health Check: How Prudently Does Safe Lane Gaming (NGM:SLG B) Use Debt?

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.' 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 Safe Lane Gaming AB (publ) (NGM:SLG B) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Safe Lane Gaming

What Is Safe Lane Gaming's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Safe Lane Gaming had kr27.3m of debt, an increase on none, over one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Safe Lane Gaming's Liabilities

We can see from the most recent balance sheet that Safe Lane Gaming had liabilities of kr46.7m falling due within a year, and liabilities of kr25.7m due beyond that. Offsetting these obligations, it had cash of kr531.6k as well as receivables valued at kr7.82m due within 12 months. So it has liabilities totalling kr64.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the kr40.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Safe Lane Gaming would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Safe Lane Gaming will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Safe Lane Gaming had a loss before interest and tax, and actually shrunk its revenue by 41%, to kr34m. That makes us nervous, to say the least.

Caveat Emptor

While Safe Lane Gaming's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping kr45m. Considering that alongside the liabilities mentioned above make us nervous 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 kr49m. And until that time we think this is a risky stock. 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 Safe Lane Gaming is showing 5 warning signs in our investment analysis , and 4 of those are potentially serious...

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.