We Think 1957 (Hospitality) (HKG:8495) Can Manage Its Debt With Ease

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. As with many other companies 1957 & Co. (Hospitality) Limited (HKG:8495) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for 1957 (Hospitality)

What Is 1957 (Hospitality)'s Debt?

As you can see below, 1957 (Hospitality) had HK$80.8m of debt at December 2021, down from HK$127.7m a year prior. However, its balance sheet shows it holds HK$98.8m in cash, so it actually has HK$18.0m net cash.

How Healthy Is 1957 (Hospitality)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that 1957 (Hospitality) had liabilities of HK$114.3m due within 12 months and liabilities of HK$18.8m due beyond that. Offsetting these obligations, it had cash of HK$98.8m as well as receivables valued at HK$7.83m due within 12 months. So it has liabilities totalling HK$26.5m more than its cash and near-term receivables, combined.

Of course, 1957 (Hospitality) has a market capitalization of HK$178.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, 1957 (Hospitality) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, 1957 (Hospitality) is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 489% gain in the last twelve months. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While 1957 (Hospitality) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, 1957 (Hospitality) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although 1957 (Hospitality)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$18.0m. And it impressed us with free cash flow of HK$100m, being 1,997% of its EBIT. So is 1957 (Hospitality)'s debt a risk? It doesn't seem so to us. 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. Be aware that 1957 (Hospitality) is showing 2 warning signs in our investment analysis , you should know about...

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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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.