Does Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 note that Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG) 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. If things get really bad, the lenders can take control of the business. 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. 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 Shangri-La Hotels (Malaysia) Berhad

What Is Shangri-La Hotels (Malaysia) Berhad's Net Debt?

As you can see below, at the end of December 2023, Shangri-La Hotels (Malaysia) Berhad had RM216.7m of debt, up from RM201.3m a year ago. Click the image for more detail. On the flip side, it has RM195.8m in cash leading to net debt of about RM20.9m.

How Healthy Is Shangri-La Hotels (Malaysia) Berhad's Balance Sheet?

According to the last reported balance sheet, Shangri-La Hotels (Malaysia) Berhad had liabilities of RM335.8m due within 12 months, and liabilities of RM39.5m due beyond 12 months. Offsetting these obligations, it had cash of RM195.8m as well as receivables valued at RM33.1m due within 12 months. So its liabilities total RM146.4m more than the combination of its cash and short-term receivables.

Since publicly traded Shangri-La Hotels (Malaysia) Berhad shares are worth a total of RM902.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Shangri-La Hotels (Malaysia) Berhad's low debt to EBITDA ratio of 0.18 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 5.3 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Pleasingly, Shangri-La Hotels (Malaysia) Berhad is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 2,278% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Shangri-La Hotels (Malaysia) Berhad'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Shangri-La Hotels (Malaysia) Berhad 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

Shangri-La Hotels (Malaysia) Berhad's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Overall, we don't think Shangri-La Hotels (Malaysia) Berhad is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Shangri-La Hotels (Malaysia) Berhad that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.