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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies NH Hotel Group, S.A. (BME:NHH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for NH Hotel Group

How Much Debt Does NH Hotel Group Carry?

You can click the graphic below for the historical numbers, but it shows that NH Hotel Group had €813.0m of debt in December 2021, down from €998.1m, one year before. However, it also had €243.9m in cash, and so its net debt is €569.1m.

How Healthy Is NH Hotel Group's Balance Sheet?

We can see from the most recent balance sheet that NH Hotel Group had liabilities of €614.0m falling due within a year, and liabilities of €2.71b due beyond that. On the other hand, it had cash of €243.9m and €136.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.94b.

The deficiency here weighs heavily on the €1.65b 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. At the end of the day, NH Hotel Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to €746m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though NH Hotel Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost €66m at the EBIT level. 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 €134m. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for NH Hotel Group that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.