Is Hostelworld Group (LON:HSW) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Hostelworld Group plc (LON:HSW) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hostelworld Group

What Is Hostelworld Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Hostelworld Group had debt of €26.2m, up from €3.45m in one year. However, it does have €33.7m in cash offsetting this, leading to net cash of €7.50m.

How Healthy Is Hostelworld Group's Balance Sheet?

We can see from the most recent balance sheet that Hostelworld Group had liabilities of €19.9m falling due within a year, and liabilities of €28.2m due beyond that. On the other hand, it had cash of €33.7m and €932.0k worth of receivables due within a year. So its liabilities total €13.4m more than the combination of its cash and short-term receivables.

Since publicly traded Hostelworld Group shares are worth a total of €95.8m, 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, Hostelworld 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 Hostelworld Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Hostelworld Group had a loss before interest and tax, and actually shrunk its revenue by 88%, to €6.2m. To be frank that doesn't bode well.

So How Risky Is Hostelworld Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hostelworld Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €21m and booked a €51m accounting loss. Given it only has net cash of €7.50m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hostelworld Group has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.