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.' 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, Live Nation Entertainment, Inc. (NYSE:LYV) does carry 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.
What Is Live Nation Entertainment's Net Debt?
As you can see below, Live Nation Entertainment had US$6.22b of debt at June 2024, down from US$6.61b a year prior. But on the other hand it also has US$6.40b in cash, leading to a US$180.6m net cash position.
How Healthy Is Live Nation Entertainment's Balance Sheet?
The latest balance sheet data shows that Live Nation Entertainment had liabilities of US$11.6b due within a year, and liabilities of US$7.27b falling due after that. On the other hand, it had cash of US$6.40b and US$2.46b worth of receivables due within a year. So its liabilities total US$10.0b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Live Nation Entertainment is worth a massive US$25.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Live Nation Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Live Nation Entertainment grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. While Live Nation 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. Happily for any shareholders, Live Nation Entertainment actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While Live Nation Entertainment does have more liabilities than liquid assets, it also has net cash of US$180.6m. The cherry on top was that in converted 154% of that EBIT to free cash flow, bringing in US$548m. So is Live Nation Entertainment's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Live Nation Entertainment has 1 warning sign we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
