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.' 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 Dan Hotels Ltd (TLV:DANH) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Dan Hotels
How Much Debt Does Dan Hotels Carry?
As you can see below, at the end of September 2020, Dan Hotels had ₪942.6m of debt, up from ₪742.5m a year ago. Click the image for more detail. However, it also had ₪166.7m in cash, and so its net debt is ₪775.8m.
How Healthy Is Dan Hotels' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Dan Hotels had liabilities of ₪694.3m due within 12 months and liabilities of ₪843.0m due beyond that. On the other hand, it had cash of ₪166.7m and ₪164.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.21b.
This deficit isn't so bad because Dan Hotels is worth ₪2.61b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 made a loss at the EBIT level, and saw its revenue drop to ₪990m, which is a fall of 32%. To be frank that doesn't bode well.
Caveat Emptor
While Dan Hotels's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₪11m. 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. However, it doesn't help that it burned through ₪5.6m of cash over the last year. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Dan Hotels (of which 2 are a bit concerning!) you should know about.
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. 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.
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About TASE:DANH
Adequate balance sheet with questionable track record.
