Is Grupo Posadas. de (BMV:POSADASA) Weighed On By Its Debt Load?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Grupo Posadas, S.A.B. de C.V. (BMV:POSADASA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Grupo Posadas. de

What Is Grupo Posadas. de's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Grupo Posadas. de had debt of Mex$8.85b, up from Mex$7.69b in one year. However, it also had Mex$573.4m in cash, and so its net debt is Mex$8.28b.

A Look At Grupo Posadas. de's Liabilities

According to the last reported balance sheet, Grupo Posadas. de had liabilities of Mex$4.14b due within 12 months, and liabilities of Mex$15.1b due beyond 12 months. Offsetting these obligations, it had cash of Mex$573.4m as well as receivables valued at Mex$2.50b due within 12 months. So its liabilities total Mex$16.2b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the Mex$10.5b 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, Grupo Posadas. 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 you can't view debt in total isolation; since Grupo Posadas. de will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Grupo Posadas. de made a loss at the EBIT level, and saw its revenue drop to Mex$6.1b, which is a fall of 34%. That makes us nervous, to say the least.

Caveat Emptor

While Grupo Posadas. 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. To be specific the EBIT loss came in at Mex$663m. 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. Not least because it burned through Mex$245m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Grupo Posadas. de .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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