Health Check: How Prudently Does Hotel ShillaLtd (KRX:008770) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hotel Shilla Co.,Ltd (KRX:008770) does use debt in its business. But should shareholders be worried about its use of debt?

We've discovered 1 warning sign about Hotel ShillaLtd. View them for free.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Hotel ShillaLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Hotel ShillaLtd had ₩1.18t of debt, an increase on ₩1.09t, over one year. However, it does have ₩406.2b in cash offsetting this, leading to net debt of about ₩778.4b.

How Strong Is Hotel ShillaLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hotel ShillaLtd had liabilities of ₩1.15t due within 12 months and liabilities of ₩1.38t due beyond that. Offsetting these obligations, it had cash of ₩406.2b as well as receivables valued at ₩346.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩1.78t.

Given this deficit is actually higher than the company's market capitalization of ₩1.65t, we think shareholders really should watch Hotel ShillaLtd's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hotel ShillaLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

See our latest analysis for Hotel ShillaLtd

In the last year Hotel ShillaLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to ₩3.9t. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Hotel ShillaLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩5.9b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩4.4b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Hotel ShillaLtd , and understanding them should be part of your investment process.

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.