Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 Madison Square Garden Entertainment Corp. () does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Madison Square Garden Entertainment’s Debt?
As you can see below, at the end of December 2020, Madison Square Garden Entertainment had US$654.6m of debt, up from US$36.0m a year ago. Click the image for more detail. However, it does have US$1.45b in cash offsetting this, leading to net cash of US$796.8m.
How Healthy Is Madison Square Garden Entertainment’s Balance Sheet?
We can see from the most recent balance sheet that Madison Square Garden Entertainment had liabilities of US$472.3m falling due within a year, and liabilities of US$939.7m due beyond that. On the other hand, it had cash of US$1.45b and US$113.6m worth of receivables due within a year. So it can boast US$153.0m more liquid assets than total liabilities.
This surplus suggests that Madison Square Garden Entertainment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Madison Square Garden Entertainment has more cash than debt is arguably a good indication that it can manage its debt safely. 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’re focused on the future you can check out this free.
In the last year Madison Square Garden Entertainment had a loss before interest and tax, and actually shrunk its revenue by 78%, to US$228m. That makes us nervous, to say the least.
So How Risky Is Madison Square Garden Entertainment?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Madison Square Garden Entertainment had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$687m of cash and made a loss of US$223m. But the saving grace is the US$796.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that, you should know about…
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a100% free, right now.
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