Is Hoteli Haludovo Malinska d.d (ZGSE:HHLD) Using Debt In A Risky Way?

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. We can see that Hoteli Haludovo Malinska d.d. (ZGSE:HHLD) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hoteli Haludovo Malinska d.d

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

The chart below, which you can click on for greater detail, shows that Hoteli Haludovo Malinska d.d had Kn61.3m in debt in June 2021; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

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

According to the last reported balance sheet, Hoteli Haludovo Malinska d.d had liabilities of Kn2.77m due within 12 months, and liabilities of Kn74.4m due beyond 12 months. Offsetting this, it had Kn13.3k in cash and Kn117.6k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn77.1m.

The deficiency here weighs heavily on the Kn19.7m 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. 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

Not only did Hoteli Haludovo Malinska d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost Kn942k 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 Kn456k 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Hoteli Haludovo Malinska d.d you should know about.

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.

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.

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