Future Gaming Group International (NGM: FGG) Using Debt Could Be Seen As Risky
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Future Gaming Group International AB (released) (NGM: FGG) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for Future Gaming Group International
What is the debt of Future Gaming Group International?
The image below, which you can click for more details, shows that in June 2021, Future Gaming Group International had a debt of kr 127.3 million, compared to kr 117.9 million in a year. However, he has 12.5 million kr in cash offsetting this, which leads to a net debt of around 114.8 million kr.
How healthy is Future Gaming Group International’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Future Gaming Group International had a liability of 129.9 million kr due within 12 months and a liability of 308.0 kr due beyond that. In compensation for these obligations, it had cash of 12.5 million crowns as well as receivables valued at 3.20 million crowns within 12 months. Its liabilities are therefore SEK 114.5 million more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the Kroner 28.8million society like a towering colossus of mere mortals. We would therefore monitor its record closely, without a doubt. After all, Future Gaming Group International would likely need a major recapitalization if it were to pay its creditors today.
We measure a company’s indebtedness relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Low interest coverage of 0.63 times and an unusually high Net Debt / EBITDA ratio of 22.4 hit our confidence in Future Gaming Group International like a punch in the gut. The debt burden here is considerable. Worse yet, Future Gaming Group International’s EBIT is down 38% from last year. If the income continues like this for the long haul, there is an incredible chance to pay off that debt. When analyzing debt levels, the balance sheet is the obvious place to start. But it is the profits of Future Gaming Group International that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Future Gaming Group International has spent a lot of money. While investors no doubt expect this situation to reverse in due course, this clearly means its use of debt is riskier.
Our point of view
At first glance, Future Gaming Group International’s EBIT growth rate left us hesitant about the stock, and its total liability level was no more appealing than the lone empty restaurant on the busiest night of the year. year. And what’s more, his interest coverage fails to inspire confidence either. Considering everything we’ve mentioned above, it’s fair to say that Future Gaming Group International is heavily in debt. If you harvest honey without a bee costume, you might get stung, so we’ll probably stay away from that particular stock. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 4 warning signs for Future Gaming Group International (2 are a bit disturbing) you should be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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