Dalata Hotel Group (ISE:DHG) Is Carrying A Fair Bit Of Debt

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 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. Importantly, Dalata Hotel Group plc (ISE:DHG) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dalata Hotel Group

How Much Debt Does Dalata Hotel Group Carry?

You can click the graphic below for the historical numbers, but it shows that Dalata Hotel Group had €323.2m of debt in December 2020, down from €416.3m, one year before. On the flip side, it has €50.2m in cash leading to net debt of about €273.0m.

How Strong Is Dalata Hotel Group's Balance Sheet?

We can see from the most recent balance sheet that Dalata Hotel Group had liabilities of €61.0m falling due within a year, and liabilities of €758.2m due beyond that. Offsetting these obligations, it had cash of €50.2m as well as receivables valued at €5.34m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €763.7m.

This is a mountain of leverage relative to its market capitalization of €1.02b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dalata Hotel Group'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.

Over 12 months, Dalata Hotel Group made a loss at the EBIT level, and saw its revenue drop to €137m, which is a fall of 68%. To be frank that doesn't bode well.

Caveat Emptor

While Dalata Hotel Group'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 €31m at the EBIT level. 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 €14m 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. For example, we've discovered 2 warning signs for Dalata Hotel Group 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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