Is Hotel ShillaLtd (KRX:008770) Using Too Much Debt?

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.' 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 note that Hotel Shilla Co.,Ltd (KRX:008770) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. 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.

See our latest analysis for Hotel ShillaLtd

How Much Debt Does Hotel ShillaLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Hotel ShillaLtd had ₩1.04t of debt, an increase on ₩763.3b, over one year. However, it also had ₩228.0b in cash, and so its net debt is ₩812.4b.

How Healthy Is Hotel ShillaLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hotel ShillaLtd had liabilities of ₩971.7b due within 12 months and liabilities of ₩1.56t due beyond that. Offsetting these obligations, it had cash of ₩228.0b as well as receivables valued at ₩147.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩2.16t.

This deficit is considerable relative to its market capitalization of ₩3.03t, so it does suggest shareholders should keep an eye on Hotel ShillaLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hotel ShillaLtd'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, Hotel ShillaLtd made a loss at the EBIT level, and saw its revenue drop to ₩4.5t, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

While Hotel ShillaLtd'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 ₩17b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩298b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. Take risks, for example - Hotel ShillaLtd has 1 warning sign we think you should be aware of.

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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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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