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 can see that Live Nation Entertainment, Inc. (NYSE:LYV) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Live Nation Entertainment's Debt?
You can click the graphic below for the historical numbers, but it shows that Live Nation Entertainment had US$6.22b of debt in March 2024, down from US$6.61b, one year before. However, it does have US$6.50b in cash offsetting this, leading to net cash of US$282.2m.
How Strong Is Live Nation Entertainment's Balance Sheet?
We can see from the most recent balance sheet that Live Nation Entertainment had liabilities of US$11.3b falling due within a year, and liabilities of US$7.25b due beyond that. Offsetting this, it had US$6.50b in cash and US$2.28b in receivables that were due within 12 months. So it has liabilities totalling US$9.80b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Live Nation Entertainment is worth a massive US$21.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Live Nation Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely.
Another good sign is that Live Nation Entertainment has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Live Nation Entertainment's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Live Nation 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 last two years, Live Nation Entertainment actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
Although Live Nation Entertainment's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$282.2m. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in US$700m. So is Live Nation Entertainment's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Live Nation Entertainment, you may well want to click here to check an interactive graph of its earnings per share history.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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