Is MGM Resorts International (NYSE:MGM) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 MGM Resorts International (NYSE:MGM) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for MGM Resorts International

What Is MGM Resorts International's Debt?

As you can see below, MGM Resorts International had US$8.56b of debt at September 2022, down from US$12.7b a year prior. However, it does have US$5.30b in cash offsetting this, leading to net debt of about US$3.27b.

How Strong Is MGM Resorts International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MGM Resorts International had liabilities of US$5.90b due within 12 months and liabilities of US$35.5b due beyond that. Offsetting these obligations, it had cash of US$5.30b as well as receivables valued at US$943.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$35.1b.

The deficiency here weighs heavily on the US$12.5b 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. At the end of the day, MGM Resorts International would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine MGM Resorts International'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.

In the last year MGM Resorts International wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to US$13b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, MGM Resorts International still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$385m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. However, we note that trailing twelve month EBIT is worse than the free cash flow of US$1.2b and the profit of US$1.3b. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with MGM Resorts International (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.