Does PENN Entertainment (NASDAQ:PENN) Have A Healthy Balance Sheet?

Howard Marks put it well when he said, before worrying about the volatility of the stock, ‘The possibility of permanent loss is the problem I worry about… When we think about the problem of a business, we always want to check its use of debt, because too much debt can lead to disaster. Most importantly, PENN Entertainment, Inc. (NASDAQ:PENN) debt. But is this debt a concern for shareholders?

Why does debt bring problems?

Debt and other liabilities become a problem for the company if it cannot meet those obligations easily, or with free cash flow or raising money at a good price. . If things get really bad, lenders can save the business. However, a common (but painful) scenario is that it raises new equity capital at a low price, thus always draining shareholders. In exchange for dilution, however, debt can be an excellent tool for companies that need capital to invest in growth at higher rates of return. When we consider a company’s use of debt, we first look at cash and debt.

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What does PENN Entertainment owe?

The image below, which you can click for more detail, shows that in June 2022 PENN Entertainment had a debt of US $2.79b, from US $2.36bi one year. However, for having a bank balance of US $1.71b, its debt is less than US $1.08b.

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debt-equity-history-analysis
NasdaqGS: PENN Debt to Equity History October 27th 2022

A Review of PENN Entertainment’s Credits

The most recent balance sheet data shows that PENN Entertainment had $1.09b in assets recorded in one year, while liabilities of $13.0b fell after that. On the other hand, it has a revenue of US $1.71ba with US $169.4m worth of earnings in one year. As a result, it has $12.2b more in liabilities than its cash and cash equivalents, combined.

This deficit has cast a shadow over the company US $4.93b, like a colossus towering over the people. So let’s take a closer look at his balance sheet, without hesitation. After all, PENN Entertainment may need to raise more if it needs to pay its creditors today.

We use two key ratios to inform us about debt-to-income levels. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), and the second is the number of times its earnings before interest and taxes (EBIT) to cover its interest payments (or interest coverage, for short) . In this way, we are considering the amount of the loan, and the interest payments paid on it.

Given that net debt is only 0.69 times EBITDA, it’s surprising to see that PENN Entertainment’s EBIT ratio is 1.7 times. So we don’t worry, we think his debt is far from over. If PENN Entertainment can continue to increase EBIT at last year’s rate of 19% last year, then it will be easier to maintain its debt load. When looking at debt levels, the balance sheet is the obvious place to start. 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 interested in future you can check this free report showing human resource forecasts.

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Finally, while tax collectors prefer income, lenders only accept hard cash. So we need to look at whether that EBIT is leading to free cash flow. Over the past three years, PENN Entertainment has recorded free cash flow equal to 61% of its EBIT, which is average, given free cash flow excluding interest and taxes . This cold hard cash can reduce his debt whenever he wants.

Our Opinion

The second tier of debt and its interest coverage weakened PENN Entertainment’s second tier. But on the bright side, its net debt to EBITDA leaves us happy. Taking the above-mentioned factors together, we believe that PENN Entertainment’s debt poses some challenges to the company. While that debt could increase returns, we think the company’s leverage is sufficient at this point. When looking at debt levels, the balance sheet is the obvious place to start. But ultimately, every company can have problems that exist outside of the balance sheet. We found 2 warning signs with PENN Entertainment, and understanding them should be part of your investment process.

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At the end of the day, it’s best to look at businesses that are free of net debt. You can access our special list of such companies (all with a record of revenue growth). It’s free.

Analysis is difficult, but we help make it easier.

Find out if PENN Fun can be increased or decreased by looking at our full review, i.e. real estate forecasts, dangers and warnings, parts, local jobs and financial health.

Look at the Independent Measure

This article is an excerpt from Simply Wall St. We provide an opinion based on historical data and valuation forecasts using only a neutral approach and our articles are not intended to be financial advice. It is not advice to buy or sell any property, and it does not take into account your goals, or your financial situation. We aim to take you to a long-term analysis that is guided by original data. Please note that our reviews may not include new promotional offers or promotions. Simply Wall St has no position in the mentioned stocks.

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