Is NH Hotel Group (BME:NHH) A Risky Investment?

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. We can see that NH Hotel Group, S.A. (BME:NHH) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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 €1.14b of debt, up from €749.2m 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 €697.1m.

A Look At NH Hotel Group's Liabilities

We can see from the most recent balance sheet that NH Hotel Group had liabilities of €581.9m falling due within a year, and liabilities of €3.11b due beyond that. On the other hand, it had cash of €446.9m and €102.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.14b.

This deficit casts a shadow over the €1.41b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, NH Hotel Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year NH Hotel Group had a loss before interest and tax, and actually shrunk its revenue by 66%, to €404m. 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 €311m. When we look at that alongside the significant liabilities, we're not particularly confident 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 €53m over the last twelve months. 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.

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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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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