Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that World Wrestling Entertainment, Inc. (NYSE:WWE) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, 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. But on the other hand it also has US$442.8m in cash, leading to a US$223.0m net cash position.

How Strong Is World Wrestling Entertainment’s Balance Sheet?

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 this, it had US$442.8m in cash and US$113.9m in receivables that were due within 12 months. So its liabilities total US$248.3m more than the combination of its cash and short-term receivables.

Of course, World Wrestling Entertainment has a market capitalization of US$4.56b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, World Wrestling Entertainment also has more cash than debt, so we’re pretty confident it can manage its debt safely.

Fortunately, World Wrestling Entertainment grew its EBIT by 6.0% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. 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. World Wrestling Entertainment may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, World Wrestling Entertainment generated free cash flow amounting to a very robust 94% of its EBIT, more than we’d expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company’s total liabilities, it is very reassuring that World Wrestling Entertainment has US$223.0m in net cash. And it impressed us with free cash flow of US$234m, being 94% of its EBIT. So is World Wrestling Entertainment’s debt a risk? It doesn’t seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For example – World Wrestling Entertainment has 2 warning signs we think you should be aware of.

Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.

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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