Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Event Hospitality & Entertainment Limited (ASX:EVT) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Event Hospitality & Entertainment Carry?
As you can see below, Event Hospitality & Entertainment had AU$445.8m of debt at December 2021, down from AU$532.5m a year prior. However, it does have AU$153.2m in cash offsetting this, leading to net debt of about AU$292.5m.
How Healthy Is Event Hospitality & Entertainment's Balance Sheet?
We can see from the most recent balance sheet that Event Hospitality & Entertainment had liabilities of AU$404.6m falling due within a year, and liabilities of AU$1.35b due beyond that. Offsetting this, it had AU$153.2m in cash and AU$108.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$1.49b.
This deficit is considerable relative to its market capitalization of AU$2.33b, so it does suggest shareholders should keep an eye on Event Hospitality & Entertainment's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Event Hospitality & Entertainment can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Event Hospitality & Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to AU$667m. With any luck the company will be able to grow its way to profitability.
While we can certainly appreciate Event Hospitality & Entertainment's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at AU$102m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of AU$163m and the profit of AU$46m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 1 warning sign with Event Hospitality & Entertainment , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.