Health Check: How Prudently Does Meliá Hotels International (BME:MEL) Use Debt?

Simply Wall St
March 21, 2022
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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.

Check out our latest analysis for Meliá Hotels International

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.

BME:MEL Debt to Equity History March 21st 2022

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.

Caveat Emptor

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.

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