Does NH Hotel Group (BME:NHH) Have A Healthy Balance Sheet?

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.' 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. As with many other companies NH Hotel Group, S.A. (BME:NHH) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 NH Hotel Group

What Is NH Hotel Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 NH Hotel Group had €998.1m of debt, an increase on €455.6m, over one year. However, it does have €320.9m in cash offsetting this, leading to net debt of about €677.3m.

A Look At NH Hotel Group's Liabilities

Zooming in on the latest balance sheet data, we can see that NH Hotel Group had liabilities of €519.9m due within 12 months and liabilities of €3.01b due beyond that. Offsetting these obligations, it had cash of €320.9m as well as receivables valued at €101.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.11b.

The deficiency here weighs heavily on the €1.52b 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'd watch its balance sheet closely, without a doubt. After all, NH Hotel Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if NH Hotel Group 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 NH Hotel Group had a loss before interest and tax, and actually shrunk its revenue by 69%, to €536m. That makes us nervous, to say the least.

Caveat Emptor

Not only did NH Hotel Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable €302m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous 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 €200m in negative free cash flow over the last year. That means it's on the risky side of things. For riskier companies like NH Hotel Group 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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