Is Meliá Hotels International (BME:MEL) Weighed On By Its Debt Load?

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.' 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 Meliá Hotels International, S.A. (BME:MEL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Meliá Hotels International

What Is Meliá Hotels International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Meliá Hotels International had €1.38b of debt, an increase on €1.22b, over one year. However, it does have €118.1m in cash offsetting this, leading to net debt of about €1.27b.

How Healthy Is Meliá Hotels International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Meliá Hotels International had liabilities of €751.0m due within 12 months and liabilities of €3.01b due beyond that. Offsetting this, it had €118.1m in cash and €186.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.45b.

The deficiency here weighs heavily on the €1.49b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Meliá Hotels International would likely require a major re-capitalisation if it had to pay its creditors today. 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 had a loss before interest and tax, and actually shrunk its revenue by 65%, to €439m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Meliá Hotels International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €309m. 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. Not least because it had negative free cash flow of €210m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Meliá Hotels International that you should be aware of.

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.

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