World Wrestling Entertainment (NYSE:WWE) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, World Wrestling Entertainment, Inc. (NYSE:WWE) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View 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 World Wrestling Entertainment had debt of US$222.8m at the end of December 2021, a reduction from US$316.8m over a year. However, its balance sheet shows it holds US$415.8m in cash, so it actually has US$193.0m net cash.

A Look At World Wrestling Entertainment's Liabilities

Zooming in on the latest balance sheet data, we can see that World Wrestling Entertainment had liabilities of US$413.6m due within 12 months and liabilities of US$409.2m due beyond that. On the other hand, it had cash of US$415.8m and US$171.2m worth of receivables due within a year. So its liabilities total US$235.8m more than the combination of its cash and short-term receivables.

Since publicly traded World Wrestling Entertainment shares are worth a total of US$4.17b, 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.

Another good sign is that World Wrestling Entertainment has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. 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 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that World Wrestling Entertainment has US$193.0m in net cash. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in US$139m. So we don't think World Wrestling Entertainment's use of debt is 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. Be aware that World Wrestling Entertainment is showing 1 warning sign in our investment analysis , you should know about...

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.