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. As with many other companies World Wrestling Entertainment, Inc. (NYSE:WWE) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is World Wrestling Entertainment’s Debt?
The chart below, which you can click on for greater detail, shows that World Wrestling Entertainment had US$214.6m in debt in March 2020; about the same as the year before. But on the other hand it also has US$291.5m in cash, leading to a US$76.9m net cash position.
How Healthy Is World Wrestling Entertainment’s Balance Sheet?
We can see from the most recent balance sheet that World Wrestling Entertainment had liabilities of US$352.2m falling due within a year, and liabilities of US$403.3m due beyond that. Offsetting this, it had US$291.5m in cash and US$136.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$327.7m.
Of course, World Wrestling Entertainment has a market capitalization of US$3.37b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, World Wrestling Entertainment boasts net cash, so it’s fair to say it does not have a heavy debt load!
On top of that, World Wrestling Entertainment grew its EBIT by 95% over the last twelve months, and that growth will make it easier to handle its debt. 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 World Wrestling Entertainment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While World Wrestling Entertainment has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, World Wrestling Entertainment generated free cash flow amounting to a very robust 93% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.
We could understand if investors are concerned about World Wrestling Entertainment’s liabilities, but we can be reassured by the fact it has has net cash of US$76.9m. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in US$120m. So is World Wrestling Entertainment’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 2 warning signs for World Wrestling Entertainment that 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.
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