Here's Why Live Nation Entertainment (NYSE:LYV) Can Afford Some Debt

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. As with many other companies Live Nation Entertainment, Inc. (NYSE:LYV) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 Live Nation Entertainment

What Is Live Nation Entertainment's Debt?

As you can see below, at the end of September 2020, Live Nation Entertainment had US$4.94b of debt, up from US$2.76b a year ago. Click the image for more detail. However, because it has a cash reserve of US$2.63b, its net debt is less, at about US$2.31b.

A Look At Live Nation Entertainment's Liabilities

Zooming in on the latest balance sheet data, we can see that Live Nation Entertainment had liabilities of US$3.58b due within 12 months and liabilities of US$6.77b due beyond that. On the other hand, it had cash of US$2.63b and US$564.9m worth of receivables due within a year. So its liabilities total US$7.16b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Live Nation Entertainment has a huge market capitalization of US$17.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Live Nation Entertainment's ability to maintain a healthy balance sheet going forward. 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 Live Nation Entertainment had a loss before interest and tax, and actually shrunk its revenue by 60%, to US$4.5b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Live Nation Entertainment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$1.3b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$828m of cash over the last year. So to be blunt we think it is risky. 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 instance, we've identified 1 warning sign for Live Nation Entertainment that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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