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Six Flags Entertainment (NYSE:SIX) owns and operate regional theme, water and zoological parks and is the largest regional theme park operator in the world. This is a very risky area to be in during a slowdown or even a recession because of its high fixed operating costs which makes it harder to achieve the breakeven point.

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Six Flags' balance sheet has a debt ratio of 54% which presents some equilibrium in terms of capital structure if we take into consideration this is an area of activity is composed mostly by long term assets and big infrastructure. On the positive side we observe a substantial reduction on the overall cost of debt that passed from 9.05% in 2010 to 4.60% in 2011. With its debt composed mostly by long term liabilities related with park infrastructure that have a long life cycle, while short term liabilities are adaptable to sales evolution.

Nevertheless its present value is way too high when comparing the company's stock price of $49.59 with its book value per share of $11.70 and a PER (price to earnings ratio) of 71. The company's residual value is $506 million which means that in case of liquidation shareholder value would verify a depreciation of 81% due to its current market cap of $2682 million.

Analyzing the company's income statement we observe the interest expenses consume more than 1/3 of the operating income which leaves the company with little security margin to achieve its breakeven. We should take into consideration that this kind of business has a large portion of fixed costs due to the maintenance of infrastructure and even the minimum employees needed to keep the parks running, giving the company a small margin of error. Notice that a decrease on sales bigger than 6% would probably result in a loss - the number of guests falls from 24 million to 22.63 million, or the money spent by guests falls from $42.41 per user to $40 per user.

We can conclude the management team is doing a good job but this is too risky to be attractive as a long term investment and too expensive at current market price.

SIX US EQUITY

Price

Distance

Total Debt

1.441

Target

10,00

-79,82%

Total Assets

2.648

Short Entry Price

49,56

Debt Ratio

54%

Residual Value

506

Actual

Target

QT

Mkt Cap

Pr

Variation

QT

Mkt Cap

Pr

Variation

MKT CAP

54

2.682

49,59

MKT CAP

54

541

10,00

Residual VALUE

54

506

9,35

-81%

Residual VALUE

54

506

9,35

-7%

Graphics Source: Bloomberg

Source: Six Flags: Too Risky To Be Attractive And Too Expensive At Current Market Price