Is Ibase Gaming (GTSM:6441) A Risky Investment?

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.' 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, Ibase Gaming Inc. (GTSM:6441) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ibase Gaming

What Is Ibase Gaming's Net Debt?

As you can see below, at the end of September 2020, Ibase Gaming had NT$612.2m of debt, up from NT$400.0m a year ago. Click the image for more detail. However, because it has a cash reserve of NT$291.1m, its net debt is less, at about NT$321.1m.

A Look At Ibase Gaming's Liabilities

Zooming in on the latest balance sheet data, we can see that Ibase Gaming had liabilities of NT$461.7m due within 12 months and liabilities of NT$448.8m due beyond that. Offsetting these obligations, it had cash of NT$291.1m as well as receivables valued at NT$193.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$425.7m.

Of course, Ibase Gaming has a market capitalization of NT$4.57b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Ibase Gaming's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ibase Gaming wasn't profitable at an EBIT level, but managed to grow its revenue by 53%, to NT$1.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Ibase Gaming still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$18m. 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 NT$625m 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Ibase Gaming (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. 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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