Is Turism Hoteluri Restaurante Marea Neagra (BVB:EFO) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Turism, Hoteluri, Restaurante Marea Neagra S.A. (BVB:EFO) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Turism Hoteluri Restaurante Marea Neagra

How Much Debt Does Turism Hoteluri Restaurante Marea Neagra Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Turism Hoteluri Restaurante Marea Neagra had RON6.70m of debt, an increase on none, over one year. However, its balance sheet shows it holds RON13.3m in cash, so it actually has RON6.58m net cash.

A Look At Turism Hoteluri Restaurante Marea Neagra's Liabilities

We can see from the most recent balance sheet that Turism Hoteluri Restaurante Marea Neagra had liabilities of RON25.0m falling due within a year, and liabilities of RON19.0m due beyond that. Offsetting these obligations, it had cash of RON13.3m as well as receivables valued at RON8.60m due within 12 months. So its liabilities total RON22.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Turism Hoteluri Restaurante Marea Neagra is worth RON88.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Turism Hoteluri Restaurante Marea Neagra 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 it is Turism Hoteluri Restaurante Marea Neagra'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.

In the last year Turism Hoteluri Restaurante Marea Neagra had a loss before interest and tax, and actually shrunk its revenue by 40%, to RON27m. That makes us nervous, to say the least.

So How Risky Is Turism Hoteluri Restaurante Marea Neagra?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Turism Hoteluri Restaurante Marea Neagra had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of RON20m and booked a RON9.9m accounting loss. With only RON6.58m 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. 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. To that end, you should learn about the 3 warning signs we've spotted with Turism Hoteluri Restaurante Marea Neagra (including 1 which shouldn't be ignored) .

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.

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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