Is SUNCE HOTELI d.d (ZGSE:SUKC) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies SUNCE HOTELI d.d. (ZGSE:SUKC) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SUNCE HOTELI d.d

What Is SUNCE HOTELI d.d's Debt?

The chart below, which you can click on for greater detail, shows that SUNCE HOTELI d.d had Kn478.8m in debt in September 2020; about the same as the year before. On the flip side, it has Kn57.0m in cash leading to net debt of about Kn421.7m.

How Strong Is SUNCE HOTELI d.d's Balance Sheet?

The latest balance sheet data shows that SUNCE HOTELI d.d had liabilities of Kn202.8m due within a year, and liabilities of Kn423.1m falling due after that. Offsetting these obligations, it had cash of Kn57.0m as well as receivables valued at Kn44.3m due within 12 months. So it has liabilities totalling Kn524.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of Kn744.2m, so it does suggest shareholders should keep an eye on SUNCE HOTELI 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SUNCE HOTELI 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.

In the last year SUNCE HOTELI d.d had a loss before interest and tax, and actually shrunk its revenue by 55%, to Kn195m. That makes us nervous, to say the least.

Caveat Emptor

While SUNCE HOTELI 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 Kn83m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled Kn14m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for SUNCE HOTELI d.d (of which 2 are a bit concerning!) 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.

If you decide to trade SUNCE HOTELI d.d, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.