Here's Why BTG Hotels (Group) (SHSE:600258) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that BTG Hotels (Group) Co., Ltd. (SHSE:600258) 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for BTG Hotels (Group)

What Is BTG Hotels (Group)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 BTG Hotels (Group) had CN¥2.05b of debt, an increase on CN¥1.92b, over one year. However, its balance sheet shows it holds CN¥2.20b in cash, so it actually has CN¥155.2m net cash.

How Strong Is BTG Hotels (Group)'s Balance Sheet?

According to the last reported balance sheet, BTG Hotels (Group) had liabilities of CN¥4.59b due within 12 months, and liabilities of CN¥9.16b due beyond 12 months. Offsetting this, it had CN¥2.20b in cash and CN¥1.12b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥10.4b.

This deficit is considerable relative to its market capitalization of CN¥14.9b, so it does suggest shareholders should keep an eye on BTG Hotels (Group)'s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, BTG Hotels (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also relevant is that BTG Hotels (Group) has grown its EBIT by a very respectable 26% in the last year, thus enhancing its ability to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if BTG Hotels (Group) 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While BTG Hotels (Group) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, BTG Hotels (Group) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although BTG Hotels (Group)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥155.2m. And it impressed us with free cash flow of CN¥2.8b, being 230% of its EBIT. So we are not troubled with BTG Hotels (Group)'s debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that BTG Hotels (Group) is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.