We Think Monarch Casino & Resort (NASDAQ:MCRI) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Monarch Casino & Resort, Inc. (NASDAQ:MCRI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 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$51.0m of debt in March 2023, down from US$78.5m, one year before. On the flip side, it has US$34.4m in cash leading to net debt of about US$16.6m.

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

According to the last reported balance sheet, Monarch Casino & Resort had liabilities of US$113.3m due within 12 months, and liabilities of US$87.1m due beyond 12 months. Offsetting this, it had US$34.4m in cash and US$8.00m in receivables that were due within 12 months. So its liabilities total US$158.0m more than the combination of its cash and short-term receivables.

Since publicly traded Monarch Casino & Resort shares are worth a total of US$1.32b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Monarch Casino & Resort has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Monarch Casino & Resort's net debt is only 0.10 times its EBITDA. And its EBIT easily covers its interest expense, being 50.7 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that Monarch Casino & Resort grew its EBIT at 13% over the last year, further increasing its ability to manage debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Monarch Casino & Resort produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Monarch Casino & Resort's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Zooming out, Monarch Casino & Resort seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. For instance, we've identified 2 warning signs for Monarch Casino & Resort that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.