Is MGM Resorts International (NYSE:MGM) Using Too Much Debt?

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. We note that MGM Resorts International (NYSE:MGM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MGM Resorts International

How Much Debt Does MGM Resorts International Carry?

The image below, which you can click on for greater detail, shows that MGM Resorts International had debt of US$6.88b at the end of March 2023, a reduction from US$11.8b over a year. However, it does have US$4.51b in cash offsetting this, leading to net debt of about US$2.37b.

How Strong Is MGM Resorts International's Balance Sheet?

The latest balance sheet data shows that MGM Resorts International had liabilities of US$2.84b due within a year, and liabilities of US$35.5b falling due after that. Offsetting these obligations, it had cash of US$4.51b as well as receivables valued at US$755.0m due within 12 months. So its liabilities total US$33.1b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$15.5b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 32%, to US$14b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though MGM Resorts International managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$1.5b at the EBIT level. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of US$1.2b and the profit of US$1.9b. So there is definitely a chance that it can improve things in the next few years. 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 example, we've discovered 4 warning signs for MGM Resorts International (1 shouldn't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.