Here's Why Promotora de Hoteles Norte 19. de (BMV:HCITY) Is Weighed Down By Its Debt Load

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 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. We can see that Promotora de Hoteles Norte 19, S.A.B. de C.V. (BMV:HCITY) does use debt in its business. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Promotora de Hoteles Norte 19. de Carry?

The image below, which you can click on for greater detail, shows that Promotora de Hoteles Norte 19. de had debt of Mex$4.06b at the end of September 2025, a reduction from Mex$4.40b over a year. However, it does have Mex$518.9m in cash offsetting this, leading to net debt of about Mex$3.54b.

A Look At Promotora de Hoteles Norte 19. de's Liabilities

Zooming in on the latest balance sheet data, we can see that Promotora de Hoteles Norte 19. de had liabilities of Mex$989.4m due within 12 months and liabilities of Mex$4.24b due beyond that. Offsetting this, it had Mex$518.9m in cash and Mex$395.8m in receivables that were due within 12 months. So its liabilities total Mex$4.31b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the Mex$2.38b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Promotora de Hoteles Norte 19. de would likely require a major re-capitalisation if it had to pay its creditors today.

See our latest analysis for Promotora de Hoteles Norte 19. de

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While we wouldn't worry about Promotora de Hoteles Norte 19. de's net debt to EBITDA ratio of 4.7, we think its super-low interest cover of 0.75 times is a sign of high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Even worse, Promotora de Hoteles Norte 19. de saw its EBIT tank 38% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. 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 Promotora de Hoteles Norte 19. de'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Promotora de Hoteles Norte 19. de actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

To be frank both Promotora de Hoteles Norte 19. de's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Overall, it seems to us that Promotora de Hoteles Norte 19. de's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. While Promotora de Hoteles Norte 19. de didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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. 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.