Funko (NASDAQ:FNKO) 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.' 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. We note that Funko, Inc. (NASDAQ:FNKO) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Funko

What Is Funko's Debt?

The image below, which you can click on for greater detail, shows that Funko had debt of US$223.4m at the end of September 2024, a reduction from US$299.5m over a year. However, it does have US$28.5m in cash offsetting this, leading to net debt of about US$194.8m.

How Healthy Is Funko's Balance Sheet?

According to the last reported balance sheet, Funko had liabilities of US$368.2m due within 12 months, and liabilities of US$174.9m due beyond 12 months. Offsetting these obligations, it had cash of US$28.5m as well as receivables valued at US$172.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$341.9m.

This deficit isn't so bad because Funko is worth US$677.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Funko'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.

In the last year Funko had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to US$1.0b. That's not what we would hope to see.

Caveat Emptor

Importantly, Funko had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$17m. 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. We would feel better if it turned its trailing twelve month loss of US$24m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Funko has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.