RLH Properties. de (BMV:RLHA) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies RLH Properties, S.A.B. de C.V. (BMV:RLHA) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for RLH Properties. de

What Is RLH Properties. de's Net Debt?

As you can see below, at the end of September 2020, RLH Properties. de had Mex$9.55b of debt, up from Mex$6.90b a year ago. Click the image for more detail. However, it also had Mex$2.32b in cash, and so its net debt is Mex$7.23b.

How Strong Is RLH Properties. de's Balance Sheet?

The latest balance sheet data shows that RLH Properties. de had liabilities of Mex$2.38b due within a year, and liabilities of Mex$11.2b falling due after that. Offsetting this, it had Mex$2.32b in cash and Mex$1.05b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$10.2b.

This deficit is considerable relative to its market capitalization of Mex$11.3b, so it does suggest shareholders should keep an eye on RLH Properties. de's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is RLH Properties. de's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year RLH Properties. de had a loss before interest and tax, and actually shrunk its revenue by 29%, to Mex$3.2b. To be frank that doesn't bode well.

Caveat Emptor

Not only did RLH Properties. de's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost Mex$730m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled Mex$2.2b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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. For example, we've discovered 1 warning sign for RLH Properties. de that you should be aware of before investing here.

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. 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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