Rather than worrying about stock volatility, Howard Marks said, “The potential for permanent loss is the risk that worries me…and every real investor I know worries.” I am.” When I think about how risky a company is, I always like to look to the use of debt as too much debt can lead to bankruptcy. PENN Entertainment Co., Ltd. (NASDAQ:PENN) is in debt. But is this liability a concern for shareholders?
Why Debt Brings Risk?
Debt and other liabilities become dangerous to a business when it cannot easily meet these obligations through free cash flow or raising capital at an attractive price. If things get really bad, the lender will have control over the business. But the more common (but still painful) scenario is that shareholders are permanently diluted as they have to raise new capital at a lower price. But by displacing dilution, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we first consider cash and liabilities together.
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What is PENN Entertainment’s debt?
The image below, which can be clicked for more information, shows PENN Entertainment’s debt stood at $2.79 billion as of June 2022, up from $2.36 billion over the course of the year. However, with a cash reserve of US$1.71 billion, net debt is low at approximately US$1.08 billion.
See what PENN Entertainment is responsible for
The latest balance sheet data show that PENN Entertainment has $1.09 billion of debt due within one year and $13 billion of debt due in the years to come. Meanwhile, $1.71 billion in cash and his $169.4 million worth of accounts receivable were paid within a year. As such, it has a total debt of US$12.2 billion more than its cash and short-term debt combined.
This deficit casts a shadow over the $4.93 billion company and is like a colossus towering over mere mortals. So definitely we’ll be looking at that balance sheet carefully. After all, if it needs to pay its creditors today, PENN Entertainment could need a massive capital boost.
We primarily use two ratios to show the level of debt to income. The first is Net Debt divided by Earnings Before Interest, Taxes, Depreciation, Amortization (EBITDA) and the second is Earnings Before Interest and Taxes (EBIT) equals interest expense (or interest for short). cover) is the number of times to cover. In this way we consider both the absolute amount of debt and the interest paid on it.
Considering that net debt is only 0.69 times EBITDA, PENN Entertainment’s low EBIT rate of 1.7 times is surprising at first. So while we’re not necessarily alarmed, we believe the debt is far from trivial. Debt will be easier to manage if PENN Entertainment can maintain his EBIT growth of 19% last year. Clearly, the balance sheet is the starting point when analyzing debt levels. However, future earnings will determine PENN Entertainment’s ability to maintain a healthy balance sheet more than anything else.So if you are focused on the future check this out freedom A report that shows an analyst’s profit forecast.
Finally, tax officials may adore accounting benefits, but lenders only accept cold cash. So it’s clear that we need to see if that her EBIT is leading to corresponding free cash flow. In his most recent three years, PENN Entertainment recorded free cash flow equivalent to his 61% of his EBIT. This is about normal when you consider free cash flow, excluding interest and taxes. This cold cash means you can reduce your debt when you need it.
Both PENN Entertainment’s total debt level and its interest coverage were disappointing. But on the bright side of life, net debt to EBITDA makes us feel more playful. That debt could boost earnings, but we think the company has plenty of leverage right now. Clearly, the balance sheet is the starting point when analyzing debt levels. Ultimately, however, all companies may contain risks that exist outside of their balance sheets. Identified two warning signs Understanding them should be part of the investment process.
After all, it is often better to focus on companies with no net debt. Access a 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 comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …