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. Importantly, PENN Entertainment, Inc. (NASDAQ:PENN) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is PENN Entertainment's Net Debt?
As you can see below, PENN Entertainment had US$2.77b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$834.0m in cash offsetting this, leading to net debt of about US$1.93b.
A Look At PENN Entertainment's Liabilities
We can see from the most recent balance sheet that PENN Entertainment had liabilities of US$1.36b falling due within a year, and liabilities of US$11.1b due beyond that. On the other hand, it had cash of US$834.0m and US$239.7m worth of receivables due within a year. So it has liabilities totalling US$11.4b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the US$2.80b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, PENN Entertainment would probably need a major re-capitalization if its creditors were to demand repayment. 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 PENN Entertainment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year PENN Entertainment had a loss before interest and tax, and actually shrunk its revenue by 3.8%, to US$6.3b. We would much prefer see growth.
Caveat Emptor
Over the last twelve months PENN Entertainment produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$20m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through US$297m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. For riskier companies like PENN Entertainment I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
