Health Check: How Prudently Does Studio City International Holdings (NYSE:MSC) Use Debt?

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 Studio City International Holdings Limited (NYSE:MSC) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Studio City International Holdings

How Much Debt Does Studio City International Holdings Carry?

The chart below, which you can click on for greater detail, shows that Studio City International Holdings had US$2.43b in debt in September 2023; about the same as the year before. However, it does have US$293.0m in cash offsetting this, leading to net debt of about US$2.14b.

How Healthy Is Studio City International Holdings' Balance Sheet?

According to the last reported balance sheet, Studio City International Holdings had liabilities of US$131.9m due within 12 months, and liabilities of US$2.45b due beyond 12 months. On the other hand, it had cash of US$293.0m and US$41.6m worth of receivables due within a year. So it has liabilities totalling US$2.25b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$1.30b 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, Studio City International Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Studio City International Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Studio City International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 764%, to US$309m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Studio City International Holdings 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$112m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$325m in negative free cash flow over the last year. 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. To that end, you should learn about the 3 warning signs we've spotted with Studio City International Holdings (including 2 which are a bit unpleasant) .

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.