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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Hoteli Haludovo Malinska d.d. (ZGSE:HHLD) does carry debt. But the real question is whether this debt is making the company risky.

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hoteli Haludovo Malinska d.d

What Is Hoteli Haludovo Malinska d.d's Debt?

As you can see below, Hoteli Haludovo Malinska d.d had Kn62.3m of debt at December 2022, down from Kn74.7m a year prior. Net debt is about the same, since the it doesn't have much cash.

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

Zooming in on the latest balance sheet data, we can see that Hoteli Haludovo Malinska d.d had liabilities of Kn3.53m due within 12 months and liabilities of Kn73.6m due beyond that. Offsetting these obligations, it had cash of Kn37.5k as well as receivables valued at Kn84.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn77.0m.

The deficiency here weighs heavily on the Kn24.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

It seems likely shareholders hope that Hoteli Haludovo Malinska d.d can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, Hoteli Haludovo Malinska d.d had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost Kn284k at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through Kn602k in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For example - Hoteli Haludovo Malinska d.d has 4 warning signs we think 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. 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.