Is SIF Hoteluri (BVB:CAOR) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SIF Hoteluri S.A. (BVB:CAOR) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SIF Hoteluri

How Much Debt Does SIF Hoteluri Carry?

As you can see below, SIF Hoteluri had RON7.76m of debt at December 2020, down from RON8.33m a year prior. However, it also had RON5.44m in cash, and so its net debt is RON2.33m.

How Healthy Is SIF Hoteluri's Balance Sheet?

We can see from the most recent balance sheet that SIF Hoteluri had liabilities of RON4.61m falling due within a year, and liabilities of RON9.33m due beyond that. Offsetting this, it had RON5.44m in cash and RON409.4k in receivables that were due within 12 months. So it has liabilities totalling RON8.09m more than its cash and near-term receivables, combined.

Since publicly traded SIF Hoteluri shares are worth a total of RON44.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is SIF Hoteluri'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 SIF Hoteluri had a loss before interest and tax, and actually shrunk its revenue by 69%, to RON8.3m. That makes us nervous, to say the least.

Caveat Emptor

While SIF Hoteluri's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping RON5.8m. 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 RON2.2m of cash over the last year. So in short it's a really risky stock. 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. We've identified 2 warning signs with SIF Hoteluri , 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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