The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 NTN Buzztime, Inc. (NYSEMKT:NTN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does NTN Buzztime Carry?
You can click the graphic below for the historical numbers, but it shows that NTN Buzztime had US$1.99m of debt in March 2020, down from US$3.48m, one year before. However, its balance sheet shows it holds US$2.22m in cash, so it actually has US$231.0k net cash.
How Strong Is NTN Buzztime's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that NTN Buzztime had liabilities of US$4.35m due within 12 months and liabilities of US$2.81m due beyond that. Offsetting this, it had US$2.22m in cash and US$383.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.56m.
While this might seem like a lot, it is not so bad since NTN Buzztime has a market capitalization of US$8.14m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, NTN Buzztime boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is NTN Buzztime's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, NTN Buzztime made a loss at the EBIT level, and saw its revenue drop to US$17m, which is a fall of 22%. To be frank that doesn't bode well.
So How Risky Is NTN Buzztime?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months NTN Buzztime lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$39k of cash and made a loss of US$3.0m. While this does make the company a bit risky, it's important to remember it has net cash of US$231.0k. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with NTN Buzztime (including 1 which is is a bit concerning) .
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. 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. Thank you for reading.