Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Sphere Entertainment Co. (NYSE:SPHR) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Sphere Entertainment Carry?
As you can see below, at the end of September 2024, Sphere Entertainment had US$1.35b of debt, up from US$1.20b a year ago. Click the image for more detail. However, because it has a cash reserve of US$539.6m, its net debt is less, at about US$812.9m.
How Healthy Is Sphere Entertainment's Balance Sheet?
The latest balance sheet data shows that Sphere Entertainment had liabilities of US$1.32b due within a year, and liabilities of US$963.1m falling due after that. Offsetting this, it had US$539.6m in cash and US$126.7m in receivables that were due within 12 months. So it has liabilities totalling US$1.61b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of US$1.52b, we think shareholders really should watch Sphere Entertainment's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Sphere 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.
In the last year Sphere Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 100%, to US$1.1b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Sphere Entertainment managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$198m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$9.2m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Sphere Entertainment that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
