Quote:
Originally Posted by ChipsOmNom
Can there be a better business in the world? Your customers give you money for an experience that costs little to nothing to produce. I just can’t understand how and why all these casino companies are running into financial problems. What do you know to be the cause?
From a finance standpoint, you are correct. Casinos are a money maker. They generally make bank.
However, from a finance standpoint there is a tendency to take a company that makes a lot of money and leverage it up. Why accept the returns you can get with a $1,000,000 investment when you can invest $$500'000 and borrow $500,000 instead?
Make more money with less investment!!!! Win win.
So private investment companies will buy casinos and then load it up with debt. They are money makers, so leverage is good. Make more money.
This works really well until it doesn't.
All of a sudden the economy goes into a recession and the casino doesn't make as much money as it did and lenders expect interest on that debt.
Boom. A financial problem.
Or, more likely, investors fail to realize that casinos require constant reinvestment. The gaming floor and hotel rooms need to be constantly updated to remain relevant.
Reinvestment can be put off in the short term and profits will look phenomenal in that short term However, eventually things become dated.
When they do, profits plunge.
To summarize, it is short term thinking. Running good in the short term makes people do stupid things that hurt them in the long term. I.E. leverage. ......
This is why someone like Steve Wynn was so good. He looked at buy at the bottom when everyone else was suffering. He also never assumed that the good times would last forever. So he never did stupid stuff like leverage himself to the hilt during those good times.