Some say that volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett famously said, “Volatility is far from synonymous with risk.” So it can be obvious that when thinking about how risky a particular stock is, that you need to consider debt because too much debt can sink a company. We can see that World Wrestling Entertainment, Inc. ((NYSE: WWE) uses debt in his business. The real question, however, is whether these debts make the company risky.
When is debt dangerous?
Debt is a tool to help businesses grow. However, when a company is unable to pay off its lenders, it is at their mercy. Ultimately, if the company fails to meet its legal debt repayment obligations, shareholders cannot get away with anything. However, a more common (but still costly) occurrence is when a company has to issue stocks at bargain prices and permanently dilute shareholders in order to prop up its balance sheet. The benefit of debt, of course, is that it is often cheap capital, especially when it replaces dilution in a company that is able to reinvest with high returns. When considering how much debt a business is consuming, the first thing to do is to look at the cash and debt together.
What is World Wrestling Entertainment’s Indebtedness?
The image below, which you can click for more details, shows that World Wrestling Entertainment was in debt of $ 316.8 million in December 2020, down from $ 214.4 million in one year. However, the balance sheet shows that the company holds $ 593.4 million in cash, so it actually has $ 276.6 million net in cash.
A look at World Wrestling Entertainment’s liabilities
According to its most recently reported balance sheet, World Wrestling Entertainment had liabilities of $ 496.3 million due within 12 months and liabilities of $ 412.3 million due beyond 12 months. This was offset by $ 593.4 million in cash and $ 52.0 million in receivables due within 12 months. So liabilities total $ 263.1 million more than cash and short-term receivables combined.
With publicly traded World Wrestling Entertainment shares valued at $ 4.37 billion, this level of debt is unlikely to pose a major threat. Nonetheless, it is clear that we should continue to monitor the balance sheet so that it does not deteriorate. Despite its remarkable liabilities, World Wrestling Entertainment has net cash, so it is fair to say that it does not have a heavy debt burden!
Additionally, World Wrestling Entertainment has increased EBIT by 84% over the past twelve months, and that growth will make it easier to manage its debt. When analyzing debt, the obvious starting point is the balance sheet. Above all, however, it is future profits that determine World Wrestling Entertainment’s ability to maintain a healthy balance sheet in the future. So if your focus is on the future, this is what you can check out free Analyst earnings forecast report.
After all, a business needs free cash flow to pay off debt. Accounting profits just don’t cut it. While World Wrestling Entertainment has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) into free cash flow to understand how quickly it’s building that up (or undermines) cash balance. For the past three years, World Wrestling Entertainment has actually generated more free cash flow than EBIT. There is nothing like cash when it comes to staying in the good hands of your lenders.
While it always makes sense to look at a company’s total debt, it is very comforting that World Wrestling Entertainment has net cash of $ 276.6 million. And it impressed us with free cash flow of $ 292 million, which is 108% of EBIT. We therefore do not consider World Wrestling Entertainment’s use of debt to be risky. There is no doubt that we learn the most about debt from the balance sheet. Ultimately, however, any business may have off-balance sheet risks. For example, we identified 1 warning sign for World Wrestling Entertainment you should be aware of that.
Ultimately, it’s often better to focus on companies that are net debt free. You have access our special list of such companies (all with a track record of earnings growth). It’s free.
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