Is PPHE Hotel Group (LON:PPH) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that PPHE Hotel Group Limited (LON:PPH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PPHE Hotel Group

What Is PPHE Hotel Group's Net Debt?

The chart below, which you can click on for greater detail, shows that PPHE Hotel Group had UK£990.1m in debt in June 2021; about the same as the year before. On the flip side, it has UK£177.9m in cash leading to net debt of about UK£812.2m.

How Strong Is PPHE Hotel Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PPHE Hotel Group had liabilities of UK£110.2m due within 12 months and liabilities of UK£1.10b due beyond that. On the other hand, it had cash of UK£177.9m and UK£21.1m worth of receivables due within a year. So it has liabilities totalling UK£1.01b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the UK£574.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, PPHE Hotel Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PPHE Hotel 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, PPHE Hotel Group made a loss at the EBIT level, and saw its revenue drop to UK£66m, which is a fall of 75%. That makes us nervous, to say the least.

Caveat Emptor

Not only did PPHE 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 UK£65m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through UK£95m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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 2 warning signs for PPHE Hotel Group (1 shouldn't be ignored) you should be aware of.

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.

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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