Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Dan Hotels Ltd (TLV:DANH) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Dan Hotels
What Is Dan Hotels's Debt?
As you can see below, Dan Hotels had ₪753.8m of debt at March 2022, down from ₪946.9m a year prior. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Dan Hotels' Balance Sheet?
We can see from the most recent balance sheet that Dan Hotels had liabilities of ₪660.7m falling due within a year, and liabilities of ₪705.4m due beyond that. Offsetting these obligations, it had cash of ₪7.62m as well as receivables valued at ₪264.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.09b.
While this might seem like a lot, it is not so bad since Dan Hotels has a market capitalization of ₪2.69b, 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. 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 Dan Hotels 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.
Over 12 months, Dan Hotels reported revenue of ₪1.1b, which is a gain of 67%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Despite the top line growth, Dan Hotels still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₪6.2m 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. Surprisingly, we note that it actually reported positive free cash flow of ₪67m and a profit of ₪31m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Dan Hotels (including 2 which are significant) .
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About TASE:DANH
Adequate balance sheet with questionable track record.
