Does Hoteli Haludovo Malinska d.d (ZGSE:HHLD) Have A Healthy Balance Sheet?

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.' 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 Hoteli Haludovo Malinska d.d. (ZGSE:HHLD) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hoteli Haludovo Malinska d.d

How Much Debt Does Hoteli Haludovo Malinska d.d Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hoteli Haludovo Malinska d.d had Kn72.9m of debt, an increase on Kn69.9m, over one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Hoteli Haludovo Malinska d.d's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hoteli Haludovo Malinska d.d had liabilities of Kn2.63m due within 12 months and liabilities of Kn75.7m due beyond that. Offsetting these obligations, it had cash of Kn20.7k as well as receivables valued at Kn253.3k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn78.0m.

This deficit casts a shadow over the Kn37.6m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Hoteli Haludovo Malinska d.d would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hoteli Haludovo Malinska d.d will need earnings to service that debt. 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Hoteli Haludovo Malinska d.d can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

While Hoteli Haludovo Malinska d.d'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 Kn3.0m. 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 Kn496k in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Hoteli Haludovo Malinska d.d that you should be aware of before investing here.

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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