Is DoubleDown Interactive (NASDAQ:DDI) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, DoubleDown Interactive Co., Ltd. (NASDAQ:DDI) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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.

Check out our latest analysis for DoubleDown Interactive

What Is DoubleDown Interactive's Debt?

The image below, which you can click on for greater detail, shows that DoubleDown Interactive had debt of US$36.0m at the end of June 2024, a reduction from US$38.1m over a year. But on the other hand it also has US$339.2m in cash, leading to a US$303.2m net cash position.

How Healthy Is DoubleDown Interactive's Balance Sheet?

We can see from the most recent balance sheet that DoubleDown Interactive had liabilities of US$20.4m falling due within a year, and liabilities of US$45.9m due beyond that. On the other hand, it had cash of US$339.2m and US$34.5m worth of receivables due within a year. So it can boast US$307.4m more liquid assets than total liabilities.

This surplus liquidity suggests that DoubleDown Interactive's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, DoubleDown Interactive boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that DoubleDown Interactive's load is not too heavy, because its EBIT was down 24% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine DoubleDown Interactive's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. DoubleDown Interactive may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, DoubleDown Interactive recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case DoubleDown Interactive has US$303.2m in net cash and a decent-looking balance sheet. So we don't have any problem with DoubleDown Interactive's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for DoubleDown Interactive (of which 1 is a bit concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.