Is Monarch Casino & Resort (NASDAQ:MCRI) A Risky Investment?

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. We note that Monarch Casino & Resort, Inc. (NASDAQ:MCRI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Monarch Casino & Resort

How Much Debt Does Monarch Casino & Resort Carry?

As you can see below, Monarch Casino & Resort had US$8.00m of debt at September 2023, down from US$26.2m a year prior. However, its balance sheet shows it holds US$33.9m in cash, so it actually has US$25.9m net cash.

How Healthy Is Monarch Casino & Resort's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Monarch Casino & Resort had liabilities of US$116.6m due within 12 months and liabilities of US$45.3m due beyond that. On the other hand, it had cash of US$33.9m and US$13.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$114.2m.

Since publicly traded Monarch Casino & Resort shares are worth a total of US$1.25b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Monarch Casino & Resort also has more cash than debt, so we're pretty confident it can manage its debt safely.

Monarch Casino & Resort's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Monarch Casino & Resort 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Monarch Casino & Resort 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. Over the most recent three years, Monarch Casino & Resort recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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$25.9m. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in US$128m. So we don't think Monarch Casino & Resort's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Monarch Casino & Resort you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.