Is Nitro Games Oyj (STO:NITRO) Using Too Much 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.' 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. As with many other companies Nitro Games Oyj (STO:NITRO) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nitro Games Oyj

How Much Debt Does Nitro Games Oyj Carry?

As you can see below, Nitro Games Oyj had €1.72m of debt at March 2022, down from €3.27m a year prior. However, it does have €2.44m in cash offsetting this, leading to net cash of €720.6k.

How Strong 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 €1.16m due within 12 months and liabilities of €1.92m due beyond that. On the other hand, it had cash of €2.44m and €679.7k worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Nitro Games Oyj's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €21.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Nitro Games Oyj has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Nitro Games Oyj's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Nitro Games Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 99%, to €4.0m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Nitro Games Oyj?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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 €3.0m of cash and made a loss of €2.9m. Given it only has net cash of €720.6k, 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. Pre-profit companies are often risky, but they can also offer great 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. We've identified 4 warning signs with Nitro Games Oyj , and understanding them should be part of your investment process.

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.

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

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.