Health Check: How Prudently Does SIF Hoteluri (BVB:CAOR) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SIF Hoteluri S.A. (BVB:CAOR) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SIF Hoteluri

What Is SIF Hoteluri's Debt?

You can click the graphic below for the historical numbers, but it shows that SIF Hoteluri had RON7.49m of debt in June 2021, down from RON8.08m, one year before. However, its balance sheet shows it holds RON10.7m in cash, so it actually has RON3.22m net cash.

How Strong Is SIF Hoteluri's Balance Sheet?

The latest balance sheet data shows that SIF Hoteluri had liabilities of RON4.98m due within a year, and liabilities of RON9.17m falling due after that. Offsetting these obligations, it had cash of RON10.7m as well as receivables valued at RON596.0k due within 12 months. So its liabilities total RON2.84m more than the combination of its cash and short-term receivables.

Given SIF Hoteluri has a market capitalization of RON40.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, SIF Hoteluri also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SIF Hoteluri had a loss before interest and tax, and actually shrunk its revenue by 59%, to RON7.8m. To be frank that doesn't bode well.

So How Risky Is SIF Hoteluri?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year SIF Hoteluri had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of RON2.4m and booked a RON11m accounting loss. With only RON3.22m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SIF Hoteluri is showing 3 warning signs in our investment analysis , and 2 of those 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.

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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