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.' 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. 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?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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

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

You can click the graphic below for the historical numbers, but it shows that Hoteli Haludovo Malinska d.d had Kn62.3m of debt in December 2022, down from Kn74.7m, one year before. 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

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 this, it had Kn37.5k in cash and Kn84.0k in receivables that were due within 12 months. So its liabilities total Kn77.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the Kn24.7m 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hoteli Haludovo Malinska d.d will need earnings to service that debt. 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

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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Hoteli Haludovo Malinska d.d that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.