Health Check: How Prudently Does NH Hotel Group (BME:NHH) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that NH Hotel Group, S.A. (BME:NHH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NH Hotel Group

What Is NH Hotel Group's Net Debt?

As you can see below, at the end of June 2021, NH Hotel Group had €3.15b of debt, up from €1.01b a year ago. Click the image for more detail. On the flip side, it has €446.9m in cash leading to net debt of about €2.70b.

How Strong Is NH Hotel Group's Balance Sheet?

The latest balance sheet data shows that NH Hotel Group had liabilities of €581.9m due within a year, and liabilities of €3.11b falling due after that. Offsetting these obligations, it had cash of €446.9m as well as receivables valued at €102.6m due within 12 months. So it has liabilities totalling €3.14b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the €1.31b 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, NH Hotel Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NH Hotel Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, NH Hotel Group made a loss at the EBIT level, and saw its revenue drop to €568m, which is a fall of 38%. To be frank that doesn't bode well.

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). Its EBIT loss was a whopping €212m. 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 €53m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for NH Hotel Group that you should be aware of before investing here.

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.

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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