Is BTG Hotels (Group) (SHSE:600258) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, BTG Hotels (Group) Co., Ltd. (SHSE:600258) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for BTG Hotels (Group)

What Is BTG Hotels (Group)'s Debt?

You can click the graphic below for the historical numbers, but it shows that BTG Hotels (Group) had CN¥1.92b of debt in September 2023, down from CN¥2.94b, one year before. But it also has CN¥2.79b in cash to offset that, meaning it has CN¥867.0m net cash.

A Look At BTG Hotels (Group)'s Liabilities

We can see from the most recent balance sheet that BTG Hotels (Group) had liabilities of CN¥4.70b falling due within a year, and liabilities of CN¥9.48b due beyond that. Offsetting these obligations, it had cash of CN¥2.79b as well as receivables valued at CN¥514.3m due within 12 months. So it has liabilities totalling CN¥10.9b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥17.0b, 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.

Notably, BTG Hotels (Group) made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥1.1b in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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. BTG Hotels (Group) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, BTG Hotels (Group) actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While BTG Hotels (Group) does have more liabilities than liquid assets, it also has net cash of CN¥867.0m. And it impressed us with free cash flow of CN¥3.1b, being 278% of its EBIT. So we don't have any problem with BTG Hotels (Group)'s use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in BTG Hotels (Group), you may well want to click here to check an interactive graph of its earnings per share history.

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.