Event Hospitality & Entertainment (ASX:EVT) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Event Hospitality & Entertainment Limited (ASX:EVT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Event Hospitality & Entertainment

What Is Event Hospitality & Entertainment's Debt?

The chart below, which you can click on for greater detail, shows that Event Hospitality & Entertainment had AU$476.2m in debt in June 2021; about the same as the year before. However, it also had AU$121.0m in cash, and so its net debt is AU$355.2m.

How Strong Is Event Hospitality & Entertainment's Balance Sheet?

We can see from the most recent balance sheet that Event Hospitality & Entertainment had liabilities of AU$449.9m falling due within a year, and liabilities of AU$1.35b due beyond that. Offsetting these obligations, it had cash of AU$121.0m as well as receivables valued at AU$104.9m due within 12 months. So its liabilities total AU$1.57b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of AU$2.28b, so it does suggest shareholders should keep an eye on Event Hospitality & Entertainment's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Event Hospitality & Entertainment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Event Hospitality & Entertainment made a loss at the EBIT level, and saw its revenue drop to AU$534m, which is a fall of 46%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Event Hospitality & Entertainment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost AU$175m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of AU$48m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Event Hospitality & Entertainment has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.