Is Nitro Games Oyj (STO:NITRO) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nitro Games Oyj

What Is Nitro Games Oyj's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Nitro Games Oyj had debt of €3.60m, up from €3.24m in one year. But it also has €3.67m in cash to offset that, meaning it has €64.7k net cash.

How Healthy Is Nitro Games Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nitro Games Oyj had liabilities of €2.76m due within 12 months and liabilities of €2.17m due beyond that. Offsetting this, it had €3.67m in cash and €978.1k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €283.8k.

Having regard to Nitro Games Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €37.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 had a loss before interest and tax, and actually shrunk its revenue by 18%, to €2.1m. That's not what we would hope to see.

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 €4.1m and booked a €3.5m accounting loss. Given it only has net cash of €64.7k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Nitro Games Oyj is showing 6 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.