We Think Monarch Casino & Resort (NASDAQ:MCRI) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Monarch Casino & Resort, Inc. (NASDAQ:MCRI) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at 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$6.69m of debt at December 2022, down from US$88.2m a year prior. However, its balance sheet shows it holds US$38.8m in cash, so it actually has US$32.1m net cash.

A Look At Monarch Casino & Resort's Liabilities

According to the last reported balance sheet, Monarch Casino & Resort had liabilities of US$117.7m due within 12 months, and liabilities of US$36.2m due beyond 12 months. On the other hand, it had cash of US$38.8m and US$34.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$80.7m.

Since publicly traded Monarch Casino & Resort shares are worth a total of US$1.40b, 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. 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.

Another good sign is that Monarch Casino & Resort has been able to increase its EBIT by 25% in twelve months, making it easier to pay down 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, while the tax-man may adore accounting profits, lenders only accept 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. Looking at the most recent three years, Monarch Casino & Resort recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Monarch Casino & Resort has US$32.1m in net cash. And it impressed us with its EBIT growth of 25% over the last year. So we don't think Monarch Casino & Resort's use of debt is risky. 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. Be aware that Monarch Casino & Resort is showing 1 warning sign in our investment analysis , you should know about...

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.

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.