What does MGM Resorts International’s (NYSE:MGM) Balance Sheet Tell Us About Its Future?
Investors pursuing a solid, dependable stock investment can often be led to MGM Resorts International (NYSE:MGM), a large-cap worth US$15b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, its financial health remains the key to continued success. Let’s take a look at MGM Resorts International’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into MGM here.
Check out our latest analysis for MGM Resorts International
How much cash does MGM generate through its operations?
MGM’s debt levels surged from US$13b to US$15b over the last 12 months – this includes long-term debt. With this growth in debt, MGM’s cash and short-term investments stands at US$1.3b , ready to deploy into the business. On top of this, MGM has produced US$2.1b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 14%, indicating that MGM’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MGM’s case, it is able to generate 0.14x cash from its debt capital.
Does MGM’s liquid assets cover its short-term commitments?
Looking at MGM’s US$3.0b in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of US$2.2b, leading to a current ratio of 0.74x.
Is MGM’s debt level acceptable?
Since equity is smaller than total debt levels, MGM Resorts International is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times MGM’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For MGM, the ratio of 1.72x suggests that interest is not strongly covered. The sheer size of MGM Resorts International means it is unlikely to default or announce bankruptcy anytime soon. However, lenders may be more reluctant to lend out more funding as MGM’s low interest coverage already puts the company in a risky position.
Next Steps:
With a high level of debt on its balance sheet, MGM could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for MGM to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for MGM’s financial health. Other important fundamentals need to be considered alongside. You should continue to research MGM Resorts International to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MGM’s future growth? Take a look at our free research report of analyst consensus for MGM’s outlook.
Valuation: What is MGM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MGM is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
