Is Sphere Entertainment (NYSE:SPHR) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sphere Entertainment Co. (NYSE:SPHR) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sphere Entertainment

What Is Sphere Entertainment's Debt?

The image below, which you can click on for greater detail, shows that Sphere Entertainment had debt of US$1.41b at the end of December 2023, a reduction from US$1.99b over a year. However, it also had US$614.5m in cash, and so its net debt is US$797.0m.

A Look At Sphere Entertainment's Liabilities

Zooming in on the latest balance sheet data, we can see that Sphere Entertainment had liabilities of US$1.40b due within 12 months and liabilities of US$1.02b due beyond that. On the other hand, it had cash of US$614.5m and US$215.1m worth of receivables due within a year. So it has liabilities totalling US$1.59b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$1.67b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Sphere 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.

In the last year Sphere Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 128%, to US$723m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Sphere Entertainment managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$266m 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. Another cause for caution is that is bled US$771m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should be aware of the 2 warning signs we've spotted with Sphere Entertainment .

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.