Is Hollywood Bowl Group (LON:BOWL) Weighed On By Its Debt Load?

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 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. Importantly, Hollywood Bowl Group plc (LON:BOWL) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hollywood Bowl Group

What Is Hollywood Bowl Group's Debt?

The chart below, which you can click on for greater detail, shows that Hollywood Bowl Group had UK£28.9m in debt in March 2021; about the same as the year before. But it also has UK£37.4m in cash to offset that, meaning it has UK£8.48m net cash.

How Healthy Is Hollywood Bowl Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hollywood Bowl Group had liabilities of UK£27.7m due within 12 months and liabilities of UK£184.9m due beyond that. On the other hand, it had cash of UK£37.4m and UK£3.04m worth of receivables due within a year. So it has liabilities totalling UK£172.2m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hollywood Bowl Group is worth UK£429.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Hollywood Bowl Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hollywood Bowl Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Hollywood Bowl Group made a loss at the EBIT level, and saw its revenue drop to UK£22m, which is a fall of 83%. To be frank that doesn't bode well.

So How Risky Is Hollywood Bowl Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Hollywood Bowl Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through UK£17m of cash and made a loss of UK£22m. With only UK£8.48m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hollywood Bowl Group .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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