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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Live Nation Entertainment, Inc. (NYSE:LYV) does carry debt. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Live Nation Entertainment's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Live Nation Entertainment had US$5.76b of debt, an increase on US$5.33b, over one year. But it also has US$5.87b in cash to offset that, meaning it has US$113.9m net cash.
How Healthy Is Live Nation Entertainment's Balance Sheet?
The latest balance sheet data shows that Live Nation Entertainment had liabilities of US$8.28b due within a year, and liabilities of US$7.29b falling due after that. Offsetting these obligations, it had cash of US$5.87b as well as receivables valued at US$1.21b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.49b.
While this might seem like a lot, it is not so bad since Live Nation Entertainment has a huge market capitalization of US$21.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Live Nation Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Live Nation Entertainment 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.
In the last year Live Nation Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 890%, to US$7.8b. That's virtually the hole-in-one of revenue growth!
So How Risky Is Live Nation Entertainment?
While Live Nation Entertainment lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$2.7b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Live Nation Entertainment shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Live Nation Entertainment .
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.