We Think Arena Hospitality Group d.d (ZGSE:ARNT) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Arena Hospitality Group d.d. (ZGSE:ARNT) 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 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Arena Hospitality Group d.d

What Is Arena Hospitality Group d.d's Debt?

You can click the graphic below for the historical numbers, but it shows that Arena Hospitality Group d.d had Kn1.06b of debt in March 2021, down from Kn1.33b, one year before. On the flip side, it has Kn364.2m in cash leading to net debt of about Kn693.8m.

How Healthy Is Arena Hospitality Group d.d's Balance Sheet?

According to the last reported balance sheet, Arena Hospitality Group d.d had liabilities of Kn202.3m due within 12 months, and liabilities of Kn1.32b due beyond 12 months. Offsetting these obligations, it had cash of Kn364.2m as well as receivables valued at Kn23.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn1.13b.

This deficit is considerable relative to its market capitalization of Kn1.65b, so it does suggest shareholders should keep an eye on Arena Hospitality Group d.d's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Arena Hospitality Group d.d can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Arena Hospitality Group d.d made a loss at the EBIT level, and saw its revenue drop to Kn190m, which is a fall of 75%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Arena Hospitality Group d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping Kn171m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through Kn245m of cash over the last year. So suffice it to say we consider the stock very 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. To that end, you should be aware of the 1 warning sign we've spotted with Arena Hospitality Group d.d .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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