SUNCE HOTELI d.d (ZGSE:SUKC) Is Making Moderate Use Of 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that SUNCE HOTELI d.d. (ZGSE:SUKC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SUNCE HOTELI d.d

How Much Debt Does SUNCE HOTELI d.d Carry?

The image below, which you can click on for greater detail, shows that at December 2020 SUNCE HOTELI d.d had debt of Kn482.7m, up from Kn450.4m in one year. However, it also had Kn18.0m in cash, and so its net debt is Kn464.7m.

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

According to the last reported balance sheet, SUNCE HOTELI d.d had liabilities of Kn155.6m due within 12 months, and liabilities of Kn448.6m due beyond 12 months. On the other hand, it had cash of Kn18.0m and Kn44.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn542.2m.

While this might seem like a lot, it is not so bad since SUNCE HOTELI d.d has a market capitalization of Kn952.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is SUNCE HOTELI d.d's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SUNCE HOTELI d.d had a loss before interest and tax, and actually shrunk its revenue by 61%, to Kn174m. To be frank that doesn't bode well.

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. Indeed, it lost Kn63m at the EBIT level. 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 Kn37m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. Be aware that SUNCE HOTELI d.d is showing 2 warning signs in our investment analysis , 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.

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