World Wrestling Entertainment (NYSE:WWE) Could Easily Take On More Debt

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. As with many other companies World Wrestling Entertainment, Inc. (NYSE:WWE) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for World Wrestling Entertainment

How Much Debt Does World Wrestling Entertainment Carry?

The image below, which you can click on for greater detail, shows that at December 2022 World Wrestling Entertainment had debt of US$235.4m, up from US$222.8m in one year. However, it does have US$478.7m in cash offsetting this, leading to net cash of US$243.3m.

How Healthy Is World Wrestling Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that World Wrestling Entertainment had liabilities of US$432.4m due within 12 months and liabilities of US$405.9m due beyond that. Offsetting these obligations, it had cash of US$478.7m as well as receivables valued at US$112.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$247.2m.

Since publicly traded World Wrestling Entertainment shares are worth a total of US$6.22b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, World Wrestling Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that World Wrestling Entertainment grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine World Wrestling Entertainment's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. World Wrestling 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. Over the most recent three years, World Wrestling Entertainment recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about World Wrestling Entertainment's liabilities, but we can be reassured by the fact it has has net cash of US$243.3m. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in US$126m. So is World Wrestling Entertainment's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for World Wrestling Entertainment you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.