Is Ibase Gaming (GTSM:6441) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Ibase Gaming Inc. (GTSM:6441) does have debt on its balance sheet. 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ibase Gaming

How Much Debt Does Ibase Gaming Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Ibase Gaming had debt of NT$1.38b, up from NT$570.0m in one year. However, because it has a cash reserve of NT$1.03b, its net debt is less, at about NT$351.4m.

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$548.2m due within 12 months and liabilities of NT$1.23b due beyond that. Offsetting these obligations, it had cash of NT$1.03b as well as receivables valued at NT$325.5m due within 12 months. So its liabilities total NT$417.8m more than the combination of its cash and short-term receivables.

Given Ibase Gaming has a market capitalization of NT$5.15b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ibase Gaming will need earnings to service that debt. 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 107%, to NT$1.3b. So its pretty obvious shareholders are hoping for more growth!

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$59m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$404m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Ibase Gaming (at least 2 which don't sit too well with us) , 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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