We Think Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG) Has A Fair Chunk Of Debt

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 can see that Shangri-La Hotels (Malaysia) Berhad (KLSE:SHANG) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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. 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 Shangri-La Hotels (Malaysia) Berhad

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

As you can see below, Shangri-La Hotels (Malaysia) Berhad had RM162.0m 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 RM129.7m in cash leading to net debt of about RM32.3m.

A Look At Shangri-La Hotels (Malaysia) Berhad's Liabilities

According to the last reported balance sheet, Shangri-La Hotels (Malaysia) Berhad had liabilities of RM257.0m due within 12 months, and liabilities of RM38.2m due beyond 12 months. On the other hand, it had cash of RM129.7m and RM27.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM137.6m.

Of course, Shangri-La Hotels (Malaysia) Berhad has a market capitalization of RM1.65b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shangri-La Hotels (Malaysia) Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shangri-La Hotels (Malaysia) Berhad made a loss at the EBIT level, and saw its revenue drop to RM172m, which is a fall of 67%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shangri-La Hotels (Malaysia) Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RM135m 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. However, it doesn't help that it burned through RM98m of cash over the last year. So suffice it to say we consider the stock very risky. 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. We've identified 1 warning sign with Shangri-La Hotels (Malaysia) Berhad , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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