Nitro Games Oyj (STO:NITRO) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Nitro Games Oyj (STO:NITRO) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nitro Games Oyj

How Much Debt Does Nitro Games Oyj Carry?

The chart below, which you can click on for greater detail, shows that Nitro Games Oyj had €3.70m in debt in September 2022; about the same as the year before. On the flip side, it has €1.90m in cash leading to net debt of about €1.80m.

A Look At Nitro Games Oyj's Liabilities

We can see from the most recent balance sheet that Nitro Games Oyj had liabilities of €3.46m falling due within a year, and liabilities of €4.76m due beyond that. Offsetting these obligations, it had cash of €1.90m as well as receivables valued at €2.01m due within 12 months. So it has liabilities totalling €4.31m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Nitro Games Oyj is worth €14.0m, 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. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Nitro Games Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 219%, to €6.8m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Nitro Games Oyj managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable €3.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €3.7m of cash over the last year. So suffice it to say we consider the stock very risky. 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 3 warning signs with Nitro Games Oyj (at least 1 which is a bit concerning) , 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.