Is Valamar Riviera d.d (ZGSE:RIVP) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Valamar Riviera d.d. (ZGSE:RIVP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Valamar Riviera d.d

How Much Debt Does Valamar Riviera d.d Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Valamar Riviera d.d had Kn3.53b of debt, an increase on Kn2.75b, over one year. However, it does have Kn665.9m in cash offsetting this, leading to net debt of about Kn2.86b.

How Healthy Is Valamar Riviera d.d's Balance Sheet?

According to the last reported balance sheet, Valamar Riviera d.d had liabilities of Kn1.01b due within 12 months, and liabilities of Kn3.01b due beyond 12 months. Offsetting this, it had Kn665.9m in cash and Kn39.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn3.31b.

This deficit is considerable relative to its market capitalization of Kn3.57b, so it does suggest shareholders should keep an eye on Valamar Riviera d.d's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Valamar Riviera d.d's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Valamar Riviera d.d had a loss before interest and tax, and actually shrunk its revenue by 70%, to Kn643m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Valamar Riviera d.d's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping Kn411m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled Kn599m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Valamar Riviera d.d that you should be aware of.

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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