These 4 Measures Indicate That DoubleDown Interactive (NASDAQ:DDI) Is Using Debt Safely

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.' 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. Importantly, DoubleDown Interactive Co., Ltd. (NASDAQ:DDI) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for DoubleDown Interactive

How Much Debt Does DoubleDown Interactive Carry?

As you can see below, at the end of September 2023, DoubleDown Interactive had US$37.2m of debt, up from US$34.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$271.2m in cash, so it actually has US$234.0m net cash.

How Strong Is DoubleDown Interactive's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DoubleDown Interactive had liabilities of US$52.8m due within 12 months and liabilities of US$9.95m due beyond that. Offsetting these obligations, it had cash of US$271.2m as well as receivables valued at US$28.4m due within 12 months. So it can boast US$236.9m more liquid assets than total liabilities.

This surplus strongly suggests that DoubleDown Interactive has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that DoubleDown Interactive has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that DoubleDown Interactive grew its EBIT by 15% last year, making its debt load easier to handle. 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. While DoubleDown Interactive has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, DoubleDown Interactive recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case DoubleDown Interactive has US$234.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 15% over the last year. So is DoubleDown Interactive's debt a risk? It doesn't seem so to us. While DoubleDown Interactive didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.