Is MGM Resorts International (NYSE:MGM) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, MGM Resorts International (NYSE:MGM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for MGM Resorts International

What Is MGM Resorts International's Debt?

You can click the graphic below for the historical numbers, but it shows that MGM Resorts International had US$8.72b of debt in December 2022, down from US$12.8b, one year before. On the flip side, it has US$5.91b in cash leading to net debt of about US$2.81b.

How Healthy Is MGM Resorts International's Balance Sheet?

We can see from the most recent balance sheet that MGM Resorts International had liabilities of US$4.52b falling due within a year, and liabilities of US$35.8b due beyond that. Offsetting these obligations, it had cash of US$5.91b as well as receivables valued at US$925.2m due within 12 months. So it has liabilities totalling US$33.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$16.6b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, MGM Resorts International 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 ultimately the future profitability of the business will decide if MGM Resorts International 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.

In the last year MGM Resorts International wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to US$13b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, MGM Resorts International still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$1.7b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of US$1.4b and free cash flow of US$991m. 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. 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 a bit unpleasant) , and understanding them should be part of your investment process.

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.