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 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. We note that Nitro Games Oyj (STO:NITRO) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.
How Much Debt Does Nitro Games Oyj Carry?
The image below, which you can click on for greater detail, shows that Nitro Games Oyj had debt of €1.72m at the end of December 2021, a reduction from €3.32m over a year. But on the other hand it also has €3.74m in cash, leading to a €2.01m net cash position.
How Strong Is Nitro Games Oyj's Balance Sheet?
According to the last reported balance sheet, Nitro Games Oyj had liabilities of €985.6k due within 12 months, and liabilities of €2.14m due beyond 12 months. Offsetting this, it had €3.74m in cash and €532.0k in receivables that were due within 12 months. So it actually has €1.15m more liquid assets than total liabilities.
This surplus suggests that Nitro Games Oyj has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Nitro Games Oyj boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.
Over 12 months, Nitro Games Oyj reported revenue of €3.2m, which is a gain of 40%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Nitro Games Oyj?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Nitro Games Oyj had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €2.9m of cash and made a loss of €2.9m. Given it only has net cash of €2.01m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Nitro Games Oyj may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example Nitro Games Oyj has 6 warning signs (and 3 which don't sit too well with us) we think 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.
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.