GameStop (NYSE: GME) has debt but no profit; Should we be worried?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is 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 GameStop Corp. (NYSE: GME) uses debt in its business. But the most important question is: what risk does this debt create?

When is Debt a Problem?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. When we look at debt levels, we first look at cash and debt levels, together.

See our latest review for GameStop

How much debt does GameStop have?

The image below, which you can click for more details, shows that GameStop was in debt of $ 46.2 million at the end of October 2021, a reduction from $ 485.5 million on a year. However, his balance sheet shows he has $ 1.41 billion in cash, so he actually has $ 1.37 billion in net cash.

NYSE Debt to Equity History: GME January 1, 2022

How healthy is GameStop’s track record?

We can see from the most recent balance sheet that GameStop had liabilities of US $ 1.53 billion due within one year and liabilities of US $ 473.8 million owed beyond that. In return, he had $ 1.41 billion in cash and $ 241.2 million in receivables due within 12 months. Its liabilities therefore total $ 352.9 million more than the combination of its cash and short-term receivables.

Considering GameStop has a massive market cap of $ 11.3 billion, it’s hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. While it has some liabilities to note, GameStop also has more cash than debt, so we’re pretty confident it can handle its debt safely. When analyzing debt levels, the balance sheet is the obvious place to start. But it’s future profits, more than anything, that will determine GameStop’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 Analyst Profit Forecast report interesting.

Year over year, GameStop reported revenue of US $ 5.9 billion, a gain of 14%, although it reported no profit before interest and taxes. This growth rate is a bit slow for our tastes, but it takes all types to make a world.

So how risky is GameStop?

We are convinced that loss-making companies are, in general, riskier than profitable ones. And we note that GameStop has recorded a loss of earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of US $ 227 million and a book loss of US $ 154 million. With only $ 1.37 billion on the balance sheet, it looks like it will soon have to raise capital again. Overall, we would say the stock is a bit risky, and we’re generally very cautious until we see positive free cash flow. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 3 warning signs for GameStop that you need to be aware of.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.

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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