Saturday, October 1, 2011

Research: MGM, Bad even as a liquidation play.
MGM shows negative earnings for the past 3 years. That's enough to stay away.

It's not even good as a liquidation play. It has a total equity of 5bn, and 2.9bn of it is goodwill. Goodwill isn't very good at all when the company's been losing money the past 3 years. The market value of MGM is 5bn, so you are unable to purchase it for its assets at a discount. I wouldn't buy this.

As a general rule, I won't buy a company that has an amount of debt which 3 years of operating cash cannot cover. There are often other liabilities (like financial and operating leases) which are basically debt but don't show up on the balance sheet as debt hidden in the 10K. This is not to say that companies which use more debt are not good companies. In general though, interest from debt just cuts into profits and I am very conservative when picking companies that I like.

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