Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Meliá Hotels International, S.A. (BME:MEL) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Meliá Hotels International's Net Debt?
The chart below, which you can click on for greater detail, shows that Meliá Hotels International had €1.39b in debt in December 2021; about the same as the year before. However, it does have €99.0m in cash offsetting this, leading to net debt of about €1.29b.
A Look At Meliá Hotels International's Liabilities
The latest balance sheet data shows that Meliá Hotels International had liabilities of €802.3m due within a year, and liabilities of €3.08b falling due after that. Offsetting this, it had €99.0m in cash and €197.4m in receivables that were due within 12 months. So its liabilities total €3.59b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the €1.46b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Meliá Hotels International would probably need a major re-capitalization if its creditors were to demand repayment. 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 Meliá Hotels International 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 Meliá Hotels International wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to €827m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Even though Meliá Hotels International managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping €220m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of €193m. And until that time we think this is a risky stock. For riskier companies like Meliá Hotels International I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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.