Stock Analysis

Live Nation Entertainment (NYSE:LYV) Seems To Use Debt Quite Sensibly

NYSE:LYV
Source: Shutterstock

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Live Nation Entertainment

What Is Live Nation Entertainment's Net Debt?

As you can see below, at the end of June 2022, Live Nation Entertainment had US$5.75b of debt, up from US$5.34b a year ago. Click the image for more detail. However, its balance sheet shows it holds US$5.86b in cash, so it actually has US$113.1m net cash.

debt-equity-history-analysis
NYSE:LYV Debt to Equity History August 24th 2022

How Strong Is Live Nation Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Live Nation Entertainment had liabilities of US$8.63b due within 12 months and liabilities of US$7.19b due beyond that. On the other hand, it had cash of US$5.86b and US$1.46b worth of receivables due within a year. So it has liabilities totalling US$8.50b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Live Nation Entertainment is worth a massive US$20.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Live Nation Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Live Nation Entertainment improved its EBIT from a last year's loss to a positive US$353m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Live Nation Entertainment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Live Nation Entertainment may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Live Nation Entertainment actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Live Nation Entertainment does have more liabilities than liquid assets, it also has net cash of US$113.1m. And it impressed us with free cash flow of US$1.9b, being 547% of its EBIT. So we don't have any problem with Live Nation Entertainment's use of debt. 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.

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.

New: AI Stock Screener & Alerts

Our new AI Stock Screener scans the market every day to uncover opportunities.

• Dividend Powerhouses (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies

Or build your own from over 50 metrics.

Explore Now for Free

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.