Stock Analysis

Studio City International Holdings (NYSE:MSC) Has Debt But No Earnings; Should You Worry?

  •  Updated
NYSE:MSC
Source: Shutterstock

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Studio City International Holdings Limited (NYSE:MSC) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Studio City International Holdings

What Is Studio City International Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Studio City International Holdings had debt of US$2.09b, up from US$1.58b in one year. However, it does have US$650.9m in cash offsetting this, leading to net debt of about US$1.44b.

debt-equity-history-analysis
NYSE:MSC Debt to Equity History November 24th 2021

How Strong Is Studio City International Holdings' Balance Sheet?

According to the last reported balance sheet, Studio City International Holdings had liabilities of US$173.0m due within 12 months, and liabilities of US$2.13b due beyond 12 months. Offsetting these obligations, it had cash of US$650.9m as well as receivables valued at US$5.63m due within 12 months. So it has liabilities totalling US$1.65b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$808.2m company, like a colossus towering over mere mortals. 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 ultimately the future profitability of the business will decide if Studio City International Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Studio City International Holdings made a loss at the EBIT level, and saw its revenue drop to US$102m, which is a fall of 47%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Studio City International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$194m. 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. For example, we would not want to see a repeat of last year's loss of US$260m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Studio City International Holdings (including 1 which doesn't sit too well with us) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Valuation is complex, but we're helping make it simple.

Find out whether Studio City International Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis