Is Hostelworld Group (LON:HSW) Using Debt Sensibly?

Warren Buffett famously said, '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. We can see that Hostelworld Group plc (LON:HSW) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hostelworld Group

What Is Hostelworld Group's Net Debt?

As you can see below, at the end of June 2021, Hostelworld Group had €26.2m of debt, up from €3.45m a year ago. Click the image for more detail. However, its balance sheet shows it holds €33.7m in cash, so it actually has €7.50m net cash.

A Look At Hostelworld Group's Liabilities

According to the last reported balance sheet, Hostelworld Group had liabilities of €19.9m due within 12 months, and liabilities of €28.2m due beyond 12 months. Offsetting this, it had €33.7m in cash and €932.0k in receivables that were due within 12 months. So its liabilities total €13.4m more than the combination of its cash and short-term receivables.

Of course, Hostelworld Group has a market capitalization of €113.2m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Hostelworld Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hostelworld Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hostelworld Group made a loss at the EBIT level, and saw its revenue drop to €6.2m, which is a fall of 88%. To be frank that doesn't bode well.

So How Risky Is Hostelworld Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Hostelworld Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €21m of cash and made a loss of €51m. With only €7.50m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 learn about the 2 warning signs we've spotted with Hostelworld Group (including 1 which makes us a bit uncomfortable) .

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.
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