Les Hôtels Baverez (EPA:ALLHB) Is Carrying A Fair Bit Of 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.' 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. 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.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Les Hôtels Baverez

What Is Les Hôtels Baverez's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Les Hôtels Baverez had debt of €21.9m, up from €19.1m in one year. However, because it has a cash reserve of €19.9m, its net debt is less, at about €2.06m.

A Look At Les Hôtels Baverez's Liabilities

We can see from the most recent balance sheet that Les Hôtels Baverez had liabilities of €6.43m falling due within a year, and liabilities of €20.8m due beyond that. Offsetting this, it had €19.9m in cash and €1.01m in receivables that were due within 12 months. So its liabilities total €6.31m more than the combination of its cash and short-term receivables.

Given Les Hôtels Baverez has a market capitalization of €147.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Les Hôtels Baverez has a very light debt load indeed. 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.

In the last year Les Hôtels Baverez wasn't profitable at an EBIT level, but managed to grow its revenue by 2,414%, to €18m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though Les Hôtels Baverez managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at €3.9m. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of €1.4m and the profit of €405k. So one might argue that there's still a chance it can get things on the right track. 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 instance, we've identified 1 warning sign for Les Hôtels Baverez 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.