Health Check: How Prudently Does Nitro Games Oyj (STO:NITRO) Use Debt?

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.' 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. Importantly, Nitro Games Oyj (STO:NITRO) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Nitro Games Oyj

How Much Debt Does Nitro Games Oyj Carry?

As you can see below, at the end of March 2024, Nitro Games Oyj had €2.54m of debt, up from €2.14m a year ago. Click the image for more detail. But it also has €3.28m in cash to offset that, meaning it has €743.0k net cash.

How Strong Is Nitro Games Oyj's Balance Sheet?

The latest balance sheet data shows that Nitro Games Oyj had liabilities of €5.39m due within a year, and liabilities of €2.77m falling due after that. Offsetting this, it had €3.28m in cash and €1.10m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.78m.

This deficit isn't so bad because Nitro Games Oyj is worth €6.98m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Nitro Games Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nitro Games Oyj 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 Nitro Games Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to €9.8m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Nitro Games Oyj?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Nitro Games Oyj lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €2.9m and booked a €2.8m accounting loss. However, it has net cash of €743.0k, so it has a bit of time before it will need more capital. Nitro Games Oyj's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Nitro Games Oyj you should know about.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com