Health Check: How Prudently Does Hoteli Haludovo Malinska d.d (ZGSE:HHLD) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Hoteli Haludovo Malinska d.d. (ZGSE:HHLD) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Hoteli Haludovo Malinska d.d

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

As you can see below, Hoteli Haludovo Malinska d.d had Kn61.1m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. And it doesn't have much cash, so its net debt is about the same.

A Look At Hoteli Haludovo Malinska d.d's Liabilities

The latest balance sheet data shows that Hoteli Haludovo Malinska d.d had liabilities of Kn2.40m due within a year, and liabilities of Kn75.2m falling due after that. Offsetting this, it had Kn4.4k in cash and Kn276.3k in receivables that were due within 12 months. So it has liabilities totalling Kn77.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the Kn30.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Hoteli Haludovo Malinska d.d would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hoteli Haludovo Malinska d.d'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.

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. Its EBIT loss was a whopping Kn3.5m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through Kn2.0m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. To that end, you should be aware of the 5 warning signs we've spotted with Hoteli Haludovo Malinska d.d .

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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