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MGM Resorts: Huge upside potential despite gloomy 4Q14 results

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Part 6
MGM Resorts: Huge upside potential despite gloomy 4Q14 results PART 6 OF 9

MGM’s liquidity improved due to an increase in current assets

Liquidity

MGM’s revenue is mostly cash-based since customers wager with cash or pay for non-gaming services with cash or credit cards. MGM depends on its resorts’ ability to generate cash flows to repay its debt, fund capital expenditures, and retain excess cash flows for future development.

MGM’s liquidity improved due to an increase in current assets

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The above chart shows that MGM’s liquidity ratios improved during 4Q14. This reflects that MGM’s ability to meet its short-term obligations is strengthening.

The improvement in liquidity ratios is mainly due to an increase in current assets. The increase in current assets was mainly attributed to a significant increase in cash and cash equivalents during the three months ending December 31, 2014. Also, MGM’s accounts payable also decreased during the three months ending December 31, 2014.

It should be noted that as of December 31, 2014, MGM’s current, quick, and cash ratio stood at 0.89, 0.81, and 0.67, respectively. However, these ratios are still lower compared to other companies—like Las Vegas Sands (LVS), Wynn Resorts (WYNN), and Melco Crown Entertainment (MPEL)—that have liquidity ratios in excess of one.

Investors could have diversified exposure in these companies through ETFs like the Consumer Discretionary Select Sector SPDR Fund (XLY) and VanEck Vectors Gaming ETF (BJK). BJK has ~25% exposure in these companies.

Liquidity ratios

The liquidity ratios determine a company’s ability to meet its short-term obligations. A company’s liquidity position can be measured mainly by using two liquidity ratios:

  • Current ratio – Current ratio is also known as the “short-term solvency ratio” or “working capital ratio.” It’s calculated by dividing current assets by current liabilities.
  • Quick ratio – Quick ratio is also known as the “liquid ratio” or “acid test ratio.” The quick ratio is more conservative than the current ratio because it excludes inventories from current assets since inventory usually takes time to convert into cash.
  • Cash ratio – The cash ratio determines a company’s ability to pay its short-term debt in a very short timeframe. It’s calculated by dividing total cash and cash equivalents by current liabilities.
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