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 can see that SIF Hoteluri S.A. (BVB:CAOR) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for SIF Hoteluri
What Is SIF Hoteluri's Net Debt?
As you can see below, SIF Hoteluri had RON8.08m of debt at June 2020, down from RON8.60m a year prior. However, it also had RON6.65m in cash, and so its net debt is RON1.43m.
A Look At SIF Hoteluri's Liabilities
The latest balance sheet data shows that SIF Hoteluri had liabilities of RON4.96m due within a year, and liabilities of RON11.3m falling due after that. On the other hand, it had cash of RON6.65m and RON392.8k worth of receivables due within a year. So its liabilities total RON9.20m more than the combination of its cash and short-term receivables.
SIF Hoteluri has a market capitalization of RON40.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 SIF Hoteluri 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.
In the last year SIF Hoteluri had a loss before interest and tax, and actually shrunk its revenue by 25%, to RON19m. To be frank that doesn't bode well.
Caveat Emptor
Not only did SIF Hoteluri's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost RON2.1m 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. For example, we would not want to see a repeat of last year's loss of RON2.3m. So we do think this stock is quite 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with SIF Hoteluri (at least 1 which makes us a bit uncomfortable) , 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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About BVB:CAOR
SIF Hoteluri
Operates hotels and other accommodation facilities in Romania.
Flawless balance sheet with solid track record.
