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.' 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, Live Nation Entertainment, Inc. (NYSE:LYV) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Live Nation Entertainment's Net Debt?
As you can see below, at the end of December 2021, Live Nation Entertainment had US$5.73b of debt, up from US$4.91b a year ago. Click the image for more detail. However, it does have US$4.88b in cash offsetting this, leading to net debt of about US$841.3m.
A Look At Live Nation Entertainment's Liabilities
The latest balance sheet data shows that Live Nation Entertainment had liabilities of US$6.86b due within a year, and liabilities of US$7.18b falling due after that. Offsetting these obligations, it had cash of US$4.88b as well as receivables valued at US$1.09b due within 12 months. So its liabilities total US$8.07b more than the combination of its cash and short-term receivables.
Live Nation Entertainment has a very large market capitalization of US$24.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 237%, to US$6.3b. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
While we can certainly appreciate Live Nation Entertainment's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$426m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$671m. In the meantime, we consider the stock very risky. 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 1 warning sign with Live Nation Entertainment , and understanding them should be part of your investment process.
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.
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.