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.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies MGM Resorts International (NYSE:MGM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is MGM Resorts International’s Debt?

The image below, which you can click on for greater detail, shows that at March 2021 MGM Resorts International had debt of US$13.3b, up from US$11.9b in one year. However, it also had US$6.17b in cash, and so its net debt is US$7.15b.

How Strong Is MGM Resorts International’s Balance Sheet?

According to the last reported balance sheet, MGM Resorts International had liabilities of US$1.84b due within 12 months, and liabilities of US$24.2b due beyond 12 months. Offsetting these obligations, it had cash of US$6.17b as well as receivables valued at US$602.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$19.3b.

This deficit is considerable relative to its very significant market capitalization of US$21.2b, so it does suggest shareholders should keep an eye on MGM Resorts International’s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MGM Resorts International can strengthen its balance sheet over time.

In the last year MGM Resorts International had a loss before interest and tax, and actually shrunk its revenue by 62%, to US$4.4b. To be frank that doesn’t bode well.

Caveat Emptor

While MGM Resorts International’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$2.0b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through US$1.4b of cash over the last year. So suffice it to say we consider the stock very 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.