Grupo Hotelero Santa Fe. de (BMV:HOTEL) Has Debt But No Earnings; Should You Worry?

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.' 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 Grupo Hotelero Santa Fe, S.A.B. de C.V. (BMV:HOTEL) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Grupo Hotelero Santa Fe. de

What Is Grupo Hotelero Santa Fe. de's Debt?

As you can see below, Grupo Hotelero Santa Fe. de had Mex$2.89b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has Mex$539.1m in cash leading to net debt of about Mex$2.35b.

How Healthy Is Grupo Hotelero Santa Fe. de's Balance Sheet?

The latest balance sheet data shows that Grupo Hotelero Santa Fe. de had liabilities of Mex$731.4m due within a year, and liabilities of Mex$3.55b falling due after that. Offsetting these obligations, it had cash of Mex$539.1m as well as receivables valued at Mex$489.1m due within 12 months. So its liabilities total Mex$3.25b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of Mex$3.05b, we think shareholders really should watch Grupo Hotelero Santa Fe. de's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Grupo Hotelero Santa Fe. 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, Grupo Hotelero Santa Fe. de made a loss at the EBIT level, and saw its revenue drop to Mex$1.1b, which is a fall of 52%. To be frank that doesn't bode well.

Caveat Emptor

While Grupo Hotelero Santa Fe. 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 Mex$189m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of Mex$384m. In the meantime, we consider the stock to be risky. 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. We've identified 3 warning signs with Grupo Hotelero Santa Fe. de (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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