David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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 Madison Square Garden Entertainment Corp. (NYSE:MSGE) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Madison Square Garden Entertainment Carry?
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, its balance sheet shows it holds US$1.45b in cash, so it actually has US$796.8m net cash.
A Look At Madison Square Garden Entertainment’s Liabilities
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 actually has US$153.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Madison Square Garden Entertainment could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. 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 Madison Square Garden Entertainment’s ability to maintain a healthy balance sheet going forward.
Over 12 months, Madison Square Garden Entertainment made a loss at the EBIT level, and saw its revenue drop to US$228m, which is a fall of 78%. To be frank that doesn’t bode well.
So How Risky Is Madison Square Garden Entertainment?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Madison Square Garden Entertainment lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$687m of cash and made a loss of US$223m. While this does make the company a bit risky, it’s important to remember it has net cash of US$796.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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.