Stock Analysis

Nitro Games Oyj (STO:NITRO) Is Making Moderate Use Of Debt

OM:NITRO
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Warren Buffett famously said, '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. As with many other companies Nitro Games Oyj (STO:NITRO) makes use of 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Nitro Games Oyj

What Is Nitro Games Oyj's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Nitro Games Oyj had €3.32m of debt, an increase on €1.08m, over one year. However, it does have €2.98m in cash offsetting this, leading to net debt of about €334.1k.

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OM:NITRO Debt to Equity History March 24th 2021

How Healthy Is Nitro Games Oyj's Balance Sheet?

We can see from the most recent balance sheet that Nitro Games Oyj had liabilities of €653.4k falling due within a year, and liabilities of €3.83m due beyond that. Offsetting these obligations, it had cash of €2.98m as well as receivables valued at €258.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €1.24m.

Given Nitro Games Oyj has a market capitalization of €12.7m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Nitro Games Oyj can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Nitro Games Oyj wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to €2.3m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Nitro Games Oyj had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €2.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €3.2m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 6 warning signs for Nitro Games Oyj (1 is significant!) that you should be aware of before investing here.

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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