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. We note that DoubleDown Interactive Co., Ltd. (NASDAQ:DDI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 DoubleDown Interactive

How Much Debt Does DoubleDown Interactive Carry?

The chart below, which you can click on for greater detail, shows that DoubleDown Interactive had US$37.9m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$372.7m in cash, so it actually has US$334.8m net cash.

How Strong Is DoubleDown Interactive's Balance Sheet?

According to the last reported balance sheet, DoubleDown Interactive had liabilities of US$19.6m due within 12 months, and liabilities of US$44.7m due beyond 12 months. Offsetting this, it had US$372.7m in cash and US$33.8m in receivables that were due within 12 months. So it can boast US$342.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that DoubleDown Interactive's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, DoubleDown Interactive boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that DoubleDown Interactive has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. 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 DoubleDown Interactive'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case DoubleDown Interactive has US$334.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. When it comes to DoubleDown Interactive's debt, we sufficiently relaxed that our mind turns to the jacuzzi. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of DoubleDown Interactive's earnings per share history for free.

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.