Does Les Hôtels Baverez (EPA:ALLHB) Have A Healthy Balance Sheet?

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 Les Hôtels Baverez S.A. (EPA:ALLHB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Les Hôtels Baverez

How Much Debt Does Les Hôtels Baverez Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Les Hôtels Baverez had €21.9m of debt, an increase on €15.3m, over one year. However, because it has a cash reserve of €11.8m, its net debt is less, at about €10.1m.

How Healthy Is Les Hôtels Baverez's Balance Sheet?

The latest balance sheet data shows that Les Hôtels Baverez had liabilities of €4.16m due within a year, and liabilities of €22.3m falling due after that. Offsetting this, it had €11.8m in cash and €6.81m in receivables that were due within 12 months. So its liabilities total €7.94m more than the combination of its cash and short-term receivables.

Of course, Les Hôtels Baverez has a market capitalization of €141.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Les Hôtels Baverez's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Les Hôtels Baverez made a loss at the EBIT level, and saw its revenue drop to €1.8m, which is a fall of 92%. To be frank that doesn't bode well.

Caveat Emptor

While Les Hôtels Baverez's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €9.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €6.5m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Les Hôtels Baverez (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.
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