Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. It’s only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Engine Gaming and Media, Inc. (CVE: GAME) uses debt in his business. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is Engine Gaming and Media Net Debt?
As you can see below, at the end of May 2021, Engine Gaming and Media was $ 11.9 million in debt, down from $ 10.6 million a year ago. Click on the image for more details. But on the other hand, it also has $ 21.3 million in cash, which leads to a net cash position of $ 9.37 million.
A look at the responsibilities of the game engine and the media
According to the latest published balance sheet, Engine Gaming and Media had a liability of US $ 39.7 million due within 12 months and a liability of US $ 11.2 million due beyond 12 months. On the other hand, he had US $ 21.3 million in cash and US $ 8.88 million in receivables due within one year. It therefore has a liability totaling US $ 20.7 million more than its cash and short-term receivables combined.
Engine Gaming and Media has a market cap of US $ 58.3 million, so it could most likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. Despite its notable liabilities, Engine Gaming and Media has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious place to start. But it is future profits, more than anything, that will determine Engine Gaming and Media’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.
Over the past year, Engine Gaming and Media has not been profitable on EBIT level, but has managed to grow its revenue by 787%, to US $ 33 million. It’s practically the hole-in-one for revenue growth!
So how risky are motor games and media?
Statistically speaking, businesses that lose money are riskier than those that earn it. And we note that Engine Gaming and Media recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, during that period, he spent $ 26 million in cash and recorded a loss of $ 40 million. With only $ 9.37 million on the balance sheet, it looks like it will soon have to raise capital again. The good news for shareholders is that Engine Gaming and Media is having tremendous revenue growth, so there is a very good chance that it will be able to increase its free cash flow in the years to come. While unprofitable businesses can be risky, they can also grow quickly and rapidly during those pre-profit years. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 5 warning signs with Engine Gaming and Media (at least 2 potentially serious) , and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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