Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Monarch Casino & Resort, Inc. (NASDAQ:MCRI) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Monarch Casino & Resort's Net Debt?

As you can see below, Monarch Casino & Resort had US$5.50m of debt at March 2024, down from US$51.0m a year prior. However, its balance sheet shows it holds US$39.5m in cash, so it actually has US$34.0m net cash.

How Strong Is Monarch Casino & Resort's Balance Sheet?

We can see from the most recent balance sheet that Monarch Casino & Resort had liabilities of US$130.2m falling due within a year, and liabilities of US$38.2m due beyond that. Offsetting this, it had US$39.5m in cash and US$10.3m in receivables that were due within 12 months. So it has liabilities totalling US$118.6m more than its cash and near-term receivables, combined.

Of course, Monarch Casino & Resort has a market capitalization of US$1.28b, so these liabilities are probably manageable. 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, Monarch Casino & Resort boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Monarch Casino & Resort saw its EBIT drop by 2.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Monarch Casino & Resort 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Monarch Casino & Resort 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. During the last three years, Monarch Casino & Resort generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Monarch Casino & Resort has US$34.0m in net cash. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in US$98m. So is Monarch Casino & Resort'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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Monarch Casino & Resort that you should be aware of before investing here.

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.

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