Nitro Games Oyj (STO:NITRO) Has Debt But No Earnings; Should You Worry?

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.' 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 note that Nitro Games Oyj (STO:NITRO) does have debt on its balance sheet. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nitro Games Oyj

What Is Nitro Games Oyj's Net Debt?

As you can see below, at the end of March 2021, Nitro Games Oyj had €3.27m of debt, up from €1.06m a year ago. Click the image for more detail. But on the other hand it also has €5.13m in cash, leading to a €1.85m net cash position.

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 €1.01m due within 12 months and liabilities of €3.65m due beyond that. On the other hand, it had cash of €5.13m and €458.3k worth of receivables due within a year. So it actually has €929.0k 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Nitro Games Oyj made a loss at the EBIT level, and saw its revenue drop to €2.0m, which is a fall of 26%. To be frank that doesn't bode well.

So How Risky Is Nitro Games Oyj?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Nitro Games Oyj had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €3.8m and booked a €3.6m accounting loss. Given it only has net cash of €1.85m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 4 warning signs with Nitro Games Oyj (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

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.
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