Is Embracer Group (STO:EMBRAC B) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Embracer Group AB (publ) (STO:EMBRAC B) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Embracer Group

How Much Debt Does Embracer Group Carry?

As you can see below, at the end of December 2021, Embracer Group had kr2.51b of debt, up from kr2.04b a year ago. Click the image for more detail. However, it does have kr15.2b in cash offsetting this, leading to net cash of kr12.7b.

How Strong Is Embracer Group's Balance Sheet?

We can see from the most recent balance sheet that Embracer Group had liabilities of kr5.42b falling due within a year, and liabilities of kr12.8b due beyond that. Offsetting this, it had kr15.2b in cash and kr3.97b in receivables that were due within 12 months. So it can boast kr998.4m more liquid assets than total liabilities.

Having regard to Embracer Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr93.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Embracer Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Embracer Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Embracer Group wasn't profitable at an EBIT level, but managed to grow its revenue by 79%, to kr16b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Embracer Group?

Although Embracer Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of kr642m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 79% is a good sign. We'd see further strong growth as an optimistic indication. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Embracer Group you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.