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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hoteles City Express, S.A.B. de C.V. (BMV:HCITY) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hoteles City Express. de

What Is Hoteles City Express. de's Debt?

You can click the graphic below for the historical numbers, but it shows that Hoteles City Express. de had Mex$6.16b of debt in September 2021, down from Mex$6.48b, one year before. On the flip side, it has Mex$1.04b in cash leading to net debt of about Mex$5.11b.

How Healthy 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$762.9m due within 12 months and liabilities of Mex$6.84b due beyond that. Offsetting this, it had Mex$1.04b in cash and Mex$582.3m in receivables that were due within 12 months. So its liabilities total Mex$5.98b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the Mex$2.04b 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Hoteles City Express. de's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Hoteles City Express. de produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping Mex$265m. 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. Nevertheless, we would not bet on it given that it lost Mex$699m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Hoteles City Express. de .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.