Does Monarch Casino & Resort (NASDAQ:MCRI) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Monarch Casino & Resort, Inc. (NASDAQ:MCRI) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Monarch Casino & Resort

What Is Monarch Casino & Resort's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Monarch Casino & Resort had US$5.50m of debt in December 2023, down from US$6.69m, one year before. But on the other hand it also has US$43.4m in cash, leading to a US$37.9m net cash position.

A Look At Monarch Casino & Resort's Liabilities

We can see from the most recent balance sheet that Monarch Casino & Resort had liabilities of US$123.4m falling due within a year, and liabilities of US$44.4m due beyond that. Offsetting this, it had US$43.4m in cash and US$13.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$111.4m.

Given Monarch Casino & Resort has a market capitalization of US$1.39b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Monarch Casino & Resort boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Monarch Casino & Resort saw its EBIT drop by 2.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Monarch Casino & Resort can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Monarch Casino & Resort may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Monarch Casino & Resort recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about Monarch Casino & Resort's liabilities, but we can be reassured by the fact it has has net cash of US$37.9m. And it impressed us with free cash flow of US$124m, being 93% of its EBIT. So is Monarch Casino & Resort'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 example, we've discovered 2 warning signs for Monarch Casino & Resort that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.