Meliá Hotels International (BME:MEL) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that Meliá Hotels International, S.A. (BME:MEL) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Meliá Hotels International

What Is Meliá Hotels International's Debt?

As you can see below, Meliá Hotels International had €1.36b of debt at December 2020, down from €2.36b a year prior. However, it also had €105.7m in cash, and so its net debt is €1.26b.

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 €759.9m due within 12 months and liabilities of €2.81b due beyond that. Offsetting this, it had €105.7m in cash and €234.1m in receivables that were due within 12 months. So its liabilities total €3.23b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €1.58b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 it is future earnings, more than anything, that will determine Meliá Hotels International's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Meliá Hotels International made a loss at the EBIT level, and saw its revenue drop to €312m, which is a fall of 82%. To be frank that doesn't bode well.

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 €475m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €302m in negative free cash flow over the last year. That means it's on the risky side of things. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Meliá Hotels International's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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