Monarch Casino & Resort (NASDAQ:MCRI) Seems To Use Debt Quite Sensibly

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.' 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 Monarch Casino & Resort, Inc. (NASDAQ:MCRI) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Monarch Casino & Resort

What Is Monarch Casino & Resort's Net Debt?

As you can see below, Monarch Casino & Resort had US$23.0m of debt at June 2024, down from US$41.0m a year prior. However, its balance sheet shows it holds US$33.5m in cash, so it actually has US$10.5m net cash.

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

The latest balance sheet data shows that Monarch Casino & Resort had liabilities of US$136.1m due within a year, and liabilities of US$37.9m falling due after that. On the other hand, it had cash of US$33.5m and US$11.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$129.1m.

Given Monarch Casino & Resort has a market capitalization of US$1.36b, 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. 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.

But the other side of the story is that Monarch Casino & Resort saw its EBIT decline by 3.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Monarch Casino & Resort's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 last three years, Monarch Casino & Resort recorded free cash flow worth a fulsome 85% 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$10.5m. And it impressed us with free cash flow of US$91m, being 85% of its EBIT. So is Monarch Casino & Resort's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Monarch Casino & Resort you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.