Health Check: How Prudently Does Warner Bros. Discovery (NASDAQ:WBD) Use Debt?

Warren Buffett famously said, '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. As with many other companies Warner Bros. Discovery, Inc. (NASDAQ:WBD) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Warner Bros. Discovery

What Is Warner Bros. Discovery's Net Debt?

The image below, which you can click on for greater detail, shows that Warner Bros. Discovery had debt of US$41.0b at the end of June 2024, a reduction from US$47.3b over a year. However, it also had US$3.68b in cash, and so its net debt is US$37.3b.

How Healthy Is Warner Bros. Discovery's Balance Sheet?

We can see from the most recent balance sheet that Warner Bros. Discovery had liabilities of US$17.8b falling due within a year, and liabilities of US$54.8b due beyond that. On the other hand, it had cash of US$3.68b and US$3.60b worth of receivables due within a year. So its liabilities total US$65.3b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$19.0b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Warner Bros. Discovery would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Warner Bros. Discovery 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.

In the last year Warner Bros. Discovery had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to US$40b. We would much prefer see growth.

Caveat Emptor

Importantly, Warner Bros. Discovery had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$235m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost US$12b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Warner Bros. Discovery that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.