Is Arena Hospitality Group d.d. za turizam i ugostiteljstvo (ZGSE:ARNT) Using Too Much 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Arena Hospitality Group d.d. za turizam i ugostiteljstvo (ZGSE:ARNT) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. za turizam i ugostiteljstvo

What Is Arena Hospitality Group d.d. za turizam i ugostiteljstvo's Net Debt?

As you can see below, at the end of September 2020, Arena Hospitality Group d.d. za turizam i ugostiteljstvo had Kn1.15b of debt, up from Kn987.4m a year ago. Click the image for more detail. However, because it has a cash reserve of Kn522.8m, its net debt is less, at about Kn630.1m.

How Healthy Is Arena Hospitality Group d.d. za turizam i ugostiteljstvo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Arena Hospitality Group d.d. za turizam i ugostiteljstvo had liabilities of Kn176.1m due within 12 months and liabilities of Kn1.33b due beyond that. Offsetting these obligations, it had cash of Kn522.8m as well as receivables valued at Kn29.1m due within 12 months. So it has liabilities totalling Kn958.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Arena Hospitality Group d.d. za turizam i ugostiteljstvo is worth Kn1.64b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Arena Hospitality Group d.d. za turizam i ugostiteljstvo can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Arena Hospitality Group d.d. za turizam i ugostiteljstvo had a loss before interest and tax, and actually shrunk its revenue by 58%, to Kn319m. That makes us nervous, to say the least.

Caveat Emptor

While Arena Hospitality Group d.d. za turizam i ugostiteljstvo's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at Kn140m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled Kn285m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 1 warning sign for Arena Hospitality Group d.d. za turizam i ugostiteljstvo you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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