PENN Entertainment (NASDAQ:PENN) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that PENN Entertainment, Inc. (NASDAQ:PENN) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 PENN Entertainment

How Much Debt Does PENN Entertainment Carry?

As you can see below, PENN Entertainment had US$2.77b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of US$834.0m, its net debt is less, at about US$1.93b.

How Healthy Is PENN Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PENN Entertainment had liabilities of US$1.36b due within 12 months and liabilities of US$11.1b due beyond that. Offsetting these obligations, it had cash of US$834.0m as well as receivables valued at US$239.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$11.4b.

The deficiency here weighs heavily on the US$2.80b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, PENN Entertainment would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine PENN Entertainment's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, PENN Entertainment made a loss at the EBIT level, and saw its revenue drop to US$6.3b, which is a fall of 3.8%. That's not what we would hope to see.

Caveat Emptor

Importantly, PENN Entertainment had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$20m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$297m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. For riskier companies like PENN Entertainment I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

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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.