Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Evolution Gaming Group AB (publ) (STO:EVO) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Evolution Gaming Group Carry?
The image below, which you can click on for greater detail, shows that Evolution Gaming Group had debt of €5.86m at the end of September 2019, a reduction from €6.94m over a year. But on the other hand it also has €141.1m in cash, leading to a €135.3m net cash position.
How Healthy Is Evolution Gaming Group's Balance Sheet?
We can see from the most recent balance sheet that Evolution Gaming Group had liabilities of €117.3m falling due within a year, and liabilities of €17.6m due beyond that. Offsetting this, it had €141.1m in cash and €121.5m in receivables that were due within 12 months. So it can boast €127.6m more liquid assets than total liabilities.
This surplus suggests that Evolution Gaming Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Evolution Gaming Group boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Evolution Gaming Group grew its EBIT by 67% over the last twelve months, and that growth will make it easier to handle its debt. 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 Evolution Gaming Group'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, a company can only pay off debt with cold hard cash, not accounting profits. While Evolution Gaming Group 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, Evolution Gaming Group recorded free cash flow worth 79% 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.
While we empathize with investors who find debt concerning, you should keep in mind that Evolution Gaming Group has net cash of €135.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 67% over the last year. So we don't think Evolution Gaming Group's use of debt is risky. We'd be very excited to see if Evolution Gaming Group insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.
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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