Share Dilution

Is Live Nation Entertainment (NYSE: LYV) a risky investment?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Live Nation Entertainment, Inc. (NYSE:LYV) is in debt. But the more important question is: what risk does this debt create?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Live Nation Entertainment

What is Live Nation Entertainment’s net debt?

As you can see below, at the end of December 2021, Live Nation Entertainment had $5.73 billion in debt, up from $4.91 billion a year ago. Click on the image for more details. However, he has $4.88 billion in cash to offset this, resulting in a net debt of approximately $841.3 million.

NYSE: LYV Debt to Equity April 16, 2022

A Look at Live Nation Entertainment’s Responsibilities

The latest balance sheet data shows that Live Nation Entertainment had liabilities of $6.86 billion due within the year, and liabilities of $7.18 billion due thereafter. As compensation for these obligations, it had cash of US$4.88 billion as well as receivables valued at US$1.09 billion due within 12 months. Thus, its liabilities total $8.07 billion more than the combination of its cash and short-term receivables.

Live Nation Entertainment has a very large market capitalization of US$24.9 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future revenue, more than anything, that will determine Live Nation Entertainment’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Last year, Live Nation Entertainment was unprofitable on an EBIT basis, but managed to grow revenue by 237% to $6.3 billion. When it comes to revenue growth, it’s like winning the 3-point game!

Caveat Emptor

While we can certainly appreciate Live Nation Entertainment’s revenue growth, its earnings before interest and tax (EBIT) loss isn’t ideal. Indeed, it lost $426 million in EBIT. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. Quite frankly, we think the track record falls short, although it could improve over time. For example, we wouldn’t want to see a repeat of last year’s US$671 million loss. In the meantime, we consider the stock to be very risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 1 warning sign with Live Nation Entertainment, and understanding them should be part of your investment process.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.