David Iben put it well when he said: “Volatility is not a risk that we care about. Our aim is to avoid a permanent loss of capital.’ So it might be obvious that you need to consider debt when considering how risky a particular stock is, because too much debt can send a company into the abyss. We can see that Dave & Busters Entertainment, Inc. (NASDAQ:PLAY) uses debt in its business. But the more important question is: How much risk does this debt carry?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it’s at their mercy. If things get really bad, lenders can take control of the deal. However, a more common (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to get the debt under control. Of course, the benefit of leverage is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high returns. When examining debt, let’s first look at both cash and debt together.
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How Much Debt Does Dave & Buster’s Entertainment Have?
You can click on the chart below to see the historical numbers, but it shows that Dave & Buster’s Entertainment had $1.23 billion in debt as of July 2022, an increase from $546.5 million dollars over a year. However, because it has a cash reserve of $100.4 million, its net debt is smaller at about $1.13 billion.
A look at Dave & Buster’s Entertainment’s liabilities
The most recent balance sheet shows that Dave & Buster’s Entertainment had $407.6 million in liabilities that were due within one year and $2.89 billion in liabilities that were due beyond that . This was offset by $100.4 million in cash and $34.7 million in receivables due within 12 months. So it has total liabilities of $3.16 billion, more than its cash and short-term receivables combined.
That deficit casts a shadow over the $1.84 billion company like a colossus towering over mere mortals. So we definitely think shareholders should watch this closely. After all, Dave & Buster’s Entertainment would likely need a major recapitalization if it had to pay its creditors today.
We measure a company’s debt burden relative to its profitability by dividing its net debt by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how well its earnings before interest and taxes (EBIT) are covering its interest costs (interest coverage) . In this way, we take into account both the absolute amount of the debt and the interest paid on it.
Dave & Buster’s Entertainment has a debt to EBITDA ratio of 3.0 and its EBIT covered its interest expense 4.3 times. This suggests that while the leverage is significant, we wouldn’t call it problematic. The silver lining is that Dave & Buster’s Entertainment grew its EBIT by 6,848% last year, fueling the idealism of the youth. If this earnings trend continues, it will be able to handle its debt burden much better going forward. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will determine whether Dave & Buster’s Entertainment can strengthen its balance sheet over time. So if you focus on the future, you can check this free Analyst earnings forecast report.
But our final consideration is also important, because a company cannot pay off debt with paper profits; it takes hard cash. So the logical step is to look at the proportion of that EBIT that corresponds to actual free cash flow. Fortunately for all shareholders, Dave & Buster’s Entertainment has actually generated more free cash flow than EBIT over the last two years. That kind of strong cash conversion excites us as much as the crowd does when the beat drops at a Daft Punk concert.
We are somewhat concerned about the severity of Dave & Buster’s Entertainment’s overall liabilities, but we also have positives to focus on. Both the EBIT to free cash flow conversion and the EBIT growth rate were encouraging signs. We think Dave & Buster’s Entertainment’s debt makes it a bit risky after looking at the above data points together. Not all risk is bad, as it can boost stock market returns when it pays off, but this debt risk is one to watch out for. When analyzing debt, the balance sheet is the obvious place to start. But ultimately, any business can have off-balance-sheet risks. You should be aware of this 1 warning sign we spotted with Dave & Buster’s Entertainment.
Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freeat the moment.
The assessment is complex, but we help to simplify it.
find out if Entertainment by Dave & Buster may be over or under priced by reviewing our comprehensive analysis which includes the following Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.
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