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. importantly, Madison Square Garden Entertainment Corp. (NYSE:MSGE) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Madison Square Garden Entertainment Carry?
As you can see below, at the end of March 2022, Madison Square Garden Entertainment had US$1.65b of debt, up from US$660.8ma year ago. Click the image for more detail. However, it does have US$999.1m in cash offsetting this, leading to net debt of about US$651.0m.
How Strong Is Madison Square Garden Entertainment’s Balance Sheet?
The latest balance sheet data shows that Madison Square Garden Entertainment had liabilities of US$964.9m due within a year, and liabilities of US$2.36b falling due after that. Offsetting these obligations, it had cash of US$999.1m as well as receivables valued at US$327.4m due within 12 months. So its liabilities total US$1.99b more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company’s market capitalization of US$1.99b, we think shareholders really should watch Madison Square Garden Entertainment’s debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Madison Square Garden Entertainment’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.
Over 12 months, Madison Square Garden Entertainment reported revenue of US$898m, which is a gain of 60%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Despite the top line growth, Madison Square Garden Entertainment still had an before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$339m. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$724m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example – Madison Square Garden Entertainment has 1 warning sign we think you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.