Health Check: How Prudently Does Turisthotel d.d (ZGSE:TUHO) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Turisthotel d.d. (ZGSE:TUHO) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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 Turisthotel d.d

What Is Turisthotel d.d's Debt?

The chart below, which you can click on for greater detail, shows that Turisthotel d.d had Kn202.0m in debt in March 2021; about the same as the year before. But it also has Kn251.7m in cash to offset that, meaning it has Kn49.8m net cash.

How Healthy Is Turisthotel d.d's Balance Sheet?

We can see from the most recent balance sheet that Turisthotel d.d had liabilities of Kn22.5m falling due within a year, and liabilities of Kn189.8m due beyond that. Offsetting this, it had Kn251.7m in cash and Kn89.0m in receivables that were due within 12 months. So it actually has Kn128.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Turisthotel d.d could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Turisthotel d.d boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Turisthotel 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.

In the last year Turisthotel d.d had a loss before interest and tax, and actually shrunk its revenue by 55%, to Kn130m. That makes us nervous, to say the least.

So How Risky Is Turisthotel d.d?

While Turisthotel d.d lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of Kn791k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Turisthotel d.d (1 can't be ignored!) that you should be aware of before investing here.

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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