Is Melco Resorts & Entertainment (NASDAQ:MLCO) Using Debt 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.' 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. As with many other companies Melco Resorts & Entertainment Limited (NASDAQ:MLCO) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Melco Resorts & Entertainment

What Is Melco Resorts & Entertainment's Net Debt?

As you can see below, at the end of June 2021, Melco Resorts & Entertainment had US$6.16b of debt, up from US$4.75b a year ago. Click the image for more detail. However, it also had US$1.81b in cash, and so its net debt is US$4.34b.

A Look At Melco Resorts & Entertainment's Liabilities

According to the last reported balance sheet, Melco Resorts & Entertainment had liabilities of US$1.00b due within 12 months, and liabilities of US$6.68b due beyond 12 months. Offsetting this, it had US$1.81b in cash and US$77.1m in receivables that were due within 12 months. So it has liabilities totalling US$5.80b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$5.79b, we think shareholders really should watch Melco Resorts & Entertainment's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Melco Resorts & Entertainment 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.

Over 12 months, Melco Resorts & Entertainment made a loss at the EBIT level, and saw its revenue drop to US$1.8b, which is a fall of 53%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Melco Resorts & Entertainment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$669m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$1.3b over the last twelve months. That means it's on the risky side of things. 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. For instance, we've identified 2 warning signs for Melco Resorts & Entertainment (1 is potentially serious) 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.
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