Magnificent Hotel Investments (HKG:201) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Magnificent Hotel Investments Limited (HKG:201) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Magnificent Hotel Investments

How Much Debt Does Magnificent Hotel Investments Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Magnificent Hotel Investments had debt of HK$481.4m, up from HK$419.2m in one year. However, it also had HK$143.3m in cash, and so its net debt is HK$338.1m.

How Healthy Is Magnificent Hotel Investments' Balance Sheet?

The latest balance sheet data shows that Magnificent Hotel Investments had liabilities of HK$287.5m due within a year, and liabilities of HK$344.4m falling due after that. On the other hand, it had cash of HK$143.3m and HK$6.24m worth of receivables due within a year. So it has liabilities totalling HK$482.4m more than its cash and near-term receivables, combined.

Magnificent Hotel Investments has a market capitalization of HK$1.01b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Magnificent Hotel Investments'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.

Over 12 months, Magnificent Hotel Investments made a loss at the EBIT level, and saw its revenue drop to HK$223m, which is a fall of 48%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Magnificent Hotel Investments's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$27m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$202m into a profit. So we do think this stock is quite risky. 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 instance, we've identified 1 warning sign for Magnificent Hotel Investments that 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.

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