Here's Why World Wrestling Entertainment (NYSE:WWE) Can Manage Its Debt Responsibly
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies World Wrestling Entertainment, Inc. (NYSE:WWE) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for World Wrestling Entertainment
What Is World Wrestling Entertainment's Debt?
You can click the graphic below for the historical numbers, but it shows that World Wrestling Entertainment had US$219.7m of debt in June 2021, down from US$414.8m, one year before. However, it does have US$442.8m in cash offsetting this, leading to net cash of US$223.0m.
A Look At World Wrestling Entertainment's Liabilities
Zooming in on the latest balance sheet data, we can see that World Wrestling Entertainment had liabilities of US$396.3m due within 12 months and liabilities of US$408.7m due beyond that. Offsetting these obligations, it had cash of US$442.8m as well as receivables valued at US$113.9m due within 12 months. So its liabilities total US$248.3m more than the combination of its cash and short-term receivables.
Since publicly traded World Wrestling Entertainment shares are worth a total of US$4.44b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, World Wrestling Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that World Wrestling Entertainment has increased its EBIT by 6.0% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if World Wrestling Entertainment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, World Wrestling Entertainment recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
We could understand if investors are concerned about World Wrestling Entertainment's liabilities, but we can be reassured by the fact it has has net cash of US$223.0m. And it impressed us with free cash flow of US$234m, being 94% of its EBIT. So we don't think World Wrestling Entertainment's use of debt 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 World Wrestling Entertainment .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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