Howard Marks put it well when he said that rather than worrying about the volatility of share prices, “The risk that worries me… and all practical investors is the possibility of permanent losses.” who I know is concerned.’ When we think about how risky a company is, we always like to look at how they use debt, because too much debt can cause. Importantly, Information about the company PENN Entertainment, Inc. (NASDAQ: PENN) carries debt. But is this debt a concern for shareholders?
Why is debt a risk?
Debts and other liabilities become a risk to a business when it cannot meet these obligations easily, with free cash flow or by raising capital at an attractive price. If things get bad, the lenders can take control of the business. However, a more common (but still painful) situation is that he has to raise new equity capital at a low cost, thus permanently diluting shareholders. By replacing leverage, however, debt can be an excellent tool for businesses that need capital to invest in growth at high rates of return. When we think about how a company uses debt, we first look at cash and debt together.
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What is PENN Entertainment’s debt?
The image below, which you can click on for more details, shows that PENN Entertainment had US$2.79b in debt in June 2022, up from US$2.36b in one year. However, as it has cash reserves of US$1.71b, its net debt is less, at around US$1.08b.
Overview of PENN Entertainment Roles
The most recent balance sheet data shows that PENN Entertainment had liabilities of US$1.09b due within a year, with liabilities of US$13.0b falling due after that. On the other hand, it had US$1.71b in cash and US$169.4m worth of payables within a year. So liabilities totaling $12.2b are greater than cash and near-term receivables, combined.
This deficit overshadows the company US $4.93b, like a colossus surpassing only deaths. So we would keep a close eye on his balance, of course. After all, PENN Entertainment would likely need a major recapitalization if it had to pay its creditors today.
We use two key ratios to tell us about debt levels compared to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), and the second is how many times its earnings before interest and tax (EBIT) cover its interest expense (or interest cover, for short). . In this way, we consider both the total amount of the debt, as well as the interest rates paid on it.
Since net debt is only 0.69 times EBITDA, it is initially surprising to see that PENN Entertainment’s EBIT has a low interest coverage of 1.7 times. So while we’re not necessarily afraid, we think his debt is far from small. If PENN Entertainment can continue to grow EBIT at last year’s rate of 19% over the past year, it will be easier to manage its debt load. When analyzing debt levels, the obvious place to start is the balance sheet. But future earnings, more than anything else, will determine PENN Entertainment’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out cheap a report showing analysts’ profit forecasts.
Finally, while the taxman may appreciate accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT leads to a corresponding free cash flow. Over the past three years, PENN Entertainment recorded free cash flow of 61% of its EBIT, which is about average, as free cash flow excludes interest and tax This cold hard cash means he can reduce his debt whenever he wants.
PENN Entertainment’s level of total liabilities and interest coverage were discouraging. But on the brighter side of life, its net debt to EBITDA makes us feel sharper. Taking the above factors together we think that PENN Entertainment’s debt poses some risks to the industry. Although this debt could boost returns, we believe the company has enough leverage now. When analyzing debt levels, the obvious place to start is the balance sheet. But in the end, risks can be out of balance at each company. We have identified 2 warning signs by PENN Entertainment, and should be understood as part of your investment process.
At the end of the day, it is often better to focus on companies that are free of net debt. You can access our exclusive list of such companies (all with a history of profitable growth). It’s free.
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