Does Hoteles City Express. de (BMV:HCITY) Have A Healthy Balance Sheet?

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.' 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. We can see that Hoteles City Express, S.A.B. de C.V. (BMV:HCITY) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Hoteles City Express. de

What Is Hoteles City Express. de's Net Debt?

As you can see below, at the end of December 2020, Hoteles City Express. de had Mex$6.41b of debt, up from Mex$5.49b a year ago. Click the image for more detail. However, because it has a cash reserve of Mex$1.12b, its net debt is less, at about Mex$5.29b.

How Strong Is Hoteles City Express. de's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hoteles City Express. de had liabilities of Mex$1.98b due within 12 months and liabilities of Mex$6.10b due beyond that. Offsetting these obligations, it had cash of Mex$1.12b as well as receivables valued at Mex$717.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$6.24b.

The deficiency here weighs heavily on the Mex$2.17b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Hoteles City Express. de would probably need a major re-capitalization if its creditors were to demand repayment. 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 Hoteles City Express. de's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hoteles City Express. de made a loss at the EBIT level, and saw its revenue drop to Mex$1.5b, which is a fall of 53%. That makes us nervous, to say the least.

Caveat Emptor

While Hoteles City Express. de'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 a very considerable Mex$597m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized Mex$306m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For example, we've discovered 2 warning signs for Hoteles City Express. de (1 is a bit concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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