The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that RLH Properties, S.A.B. de C.V. (BMV:RLHA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 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. 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.
See our latest analysis for RLH Properties. de
What Is RLH Properties. de's Debt?
The image below, which you can click on for greater detail, shows that RLH Properties. de had debt of Mex$8.42b at the end of June 2021, a reduction from Mex$9.64b over a year. On the flip side, it has Mex$4.34b in cash leading to net debt of about Mex$4.08b.
A Look At RLH Properties. de's Liabilities
According to the last reported balance sheet, RLH Properties. de had liabilities of Mex$3.25b due within 12 months, and liabilities of Mex$10.1b due beyond 12 months. On the other hand, it had cash of Mex$4.34b and Mex$1.17b worth of receivables due within a year. So it has liabilities totalling Mex$7.88b more than its cash and near-term receivables, combined.
RLH Properties. de has a market capitalization of Mex$15.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since RLH Properties. 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, RLH Properties. de saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Caveat Emptor
Over the last twelve months RLH Properties. de produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at Mex$673m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled Mex$1.3b in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with RLH Properties. de (including 1 which shouldn't be ignored) .
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. 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.
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About BMV:RLH A
RLH Properties. de
Engages in the acquisition, development, and management of hotels and resorts.
Solid track record with mediocre balance sheet.
