Hongkong and Shanghai Hotels (HKG:45) Has Debt But No Earnings; Should You Worry?

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.' 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 note that The Hongkong and Shanghai Hotels, Limited (HKG:45) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Hongkong and Shanghai Hotels

How Much Debt Does Hongkong and Shanghai Hotels Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Hongkong and Shanghai Hotels had HK$15.2b of debt, an increase on HK$13.4b, over one year. On the flip side, it has HK$585.0m in cash leading to net debt of about HK$14.6b.

How Strong Is Hongkong and Shanghai Hotels' Balance Sheet?

We can see from the most recent balance sheet that Hongkong and Shanghai Hotels had liabilities of HK$6.42b falling due within a year, and liabilities of HK$14.0b due beyond that. Offsetting these obligations, it had cash of HK$585.0m as well as receivables valued at HK$357.0m due within 12 months. So it has liabilities totalling HK$19.5b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$12.6b 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 definitely think shareholders need to watch this one closely. At the end of the day, Hongkong and Shanghai Hotels would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hongkong and Shanghai Hotels'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.

In the last year Hongkong and Shanghai Hotels wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to HK$4.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Hongkong and Shanghai Hotels still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$53m. 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 HK$464m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Hongkong and Shanghai Hotels that you should be aware of before investing here.

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.