Does 1957 (Hospitality) (HKG:8495) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, 1957 & Co. (Hospitality) Limited (HKG:8495) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for 1957 (Hospitality)

How Much Debt Does 1957 (Hospitality) Carry?

As you can see below, 1957 (Hospitality) had HK$20.2m of debt at June 2020, down from HK$157.8m a year prior. But it also has HK$51.6m in cash to offset that, meaning it has HK$31.4m net cash.

A Look At 1957 (Hospitality)'s Liabilities

According to the last reported balance sheet, 1957 (Hospitality) had liabilities of HK$117.1m due within 12 months, and liabilities of HK$59.8m due beyond 12 months. Offsetting these obligations, it had cash of HK$51.6m as well as receivables valued at HK$7.14m due within 12 months. So its liabilities total HK$118.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$73.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, 1957 (Hospitality) would probably need a major re-capitalization if its creditors were to demand repayment. Given that 1957 (Hospitality) has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is 1957 (Hospitality)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, 1957 (Hospitality) made a loss at the EBIT level, and saw its revenue drop to HK$312m, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is 1957 (Hospitality)?

While 1957 (Hospitality) lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$61m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. Be aware that 1957 (Hospitality) is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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