Is Les Hôtels Baverez (EPA:ALLHB) Using Too Much 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 Les Hôtels Baverez S.A. (EPA:ALLHB) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that ALLHB is potentially undervalued!

What Is Les Hôtels Baverez's Debt?

The chart below, which you can click on for greater detail, shows that Les Hôtels Baverez had €21.4m in debt in June 2022; about the same as the year before. But on the other hand it also has €23.1m in cash, leading to a €1.74m net cash position.

How Strong Is Les Hôtels Baverez's Balance Sheet?

According to the last reported balance sheet, Les Hôtels Baverez had liabilities of €9.33m due within 12 months, and liabilities of €19.2m due beyond 12 months. Offsetting these obligations, it had cash of €23.1m as well as receivables valued at €1.23m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.18m.

Since publicly traded Les Hôtels Baverez shares are worth a total of €122.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Les Hôtels Baverez also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Les Hôtels Baverez turned things around in the last 12 months, delivering and EBIT of €2.2m. There's no doubt that we learn most about debt from the balance sheet. But it is Les Hôtels Baverez's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Les Hôtels Baverez may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Les Hôtels Baverez actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Les Hôtels Baverez's liabilities, but we can be reassured by the fact it has has net cash of €1.74m. The cherry on top was that in converted 320% of that EBIT to free cash flow, bringing in €7.2m. So is Les Hôtels Baverez's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Les Hôtels Baverez's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.