Health Check: How Prudently Does Hoteles City Express. de (BMV:HCITY) Use Debt?

Warren Buffett famously said, '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. Importantly, Hoteles City Express, S.A.B. de C.V. (BMV:HCITY) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hoteles City Express. de

How Much Debt Does Hoteles City Express. de Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Hoteles City Express. de had debt of Mex$6.48b, up from Mex$5.16b in one year. However, it does have Mex$1.31b in cash offsetting this, leading to net debt of about Mex$5.18b.

A Look At Hoteles City Express. de's Liabilities

Zooming in on the latest balance sheet data, we can see that Hoteles City Express. de had liabilities of Mex$2.12b due within 12 months and liabilities of Mex$6.00b due beyond that. Offsetting these obligations, it had cash of Mex$1.31b as well as receivables valued at Mex$710.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$6.09b.

This deficit casts a shadow over the Mex$2.17b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Hoteles City Express. de would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hoteles City Express. de can strengthen its balance sheet over time. 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$1.9b, which is a fall of 38%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hoteles City Express. de's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable Mex$254m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through Mex$725m in the last year. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Hoteles City Express. de , and understanding them should be part of your investment process.

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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