World Wrestling Entertainment (NYSE:WWE) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 World Wrestling Entertainment, Inc. (NYSE:WWE) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for World Wrestling Entertainment

What Is World Wrestling Entertainment's Debt?

As you can see below, at the end of March 2022, World Wrestling Entertainment had US$235.0m of debt, up from US$218.3m a year ago. Click the image for more detail. But on the other hand it also has US$447.8m in cash, leading to a US$212.8m net cash position.

How Healthy Is World Wrestling Entertainment's Balance Sheet?

We can see from the most recent balance sheet that World Wrestling Entertainment had liabilities of US$425.1m falling due within a year, and liabilities of US$414.4m due beyond that. On the other hand, it had cash of US$447.8m and US$163.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$228.5m.

Since publicly traded World Wrestling Entertainment shares are worth a total of US$4.45b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, World Wrestling Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that World Wrestling Entertainment has been able to increase its EBIT by 27% 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While World Wrestling Entertainment has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, World Wrestling Entertainment recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$212.8m. And it impressed us with free cash flow of US$160m, being 80% of its EBIT. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for World Wrestling Entertainment you should be aware of, and 1 of them is concerning.

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.