Is Hongkong and Shanghai Hotels (HKG:45) Using Too Much Debt?

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. Importantly, The Hongkong and Shanghai Hotels, Limited (HKG:45) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 2021 Hongkong and Shanghai Hotels had HK$13.4b of debt, an increase on HK$11.2b, over one year. However, because it has a cash reserve of HK$479.0m, its net debt is less, at about HK$12.9b.

A Look At Hongkong and Shanghai Hotels' Liabilities

Zooming in on the latest balance sheet data, we can see that Hongkong and Shanghai Hotels had liabilities of HK$3.76b due within 12 months and liabilities of HK$15.1b due beyond that. On the other hand, it had cash of HK$479.0m and HK$378.0m worth of receivables due within a year. So its liabilities total HK$18.0b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$11.4b 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 28%, to HK$3.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Hongkong and Shanghai Hotels's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at HK$105m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$662m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Hongkong and Shanghai Hotels .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.