Is Banyan Tree Holdings (SGX:B58) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Banyan Tree Holdings Limited (SGX:B58) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Banyan Tree Holdings

What Is Banyan Tree Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Banyan Tree Holdings had S$518.5m of debt in December 2020, down from S$656.4m, one year before. However, it does have S$53.3m in cash offsetting this, leading to net debt of about S$465.2m.

A Look At Banyan Tree Holdings' Liabilities

The latest balance sheet data shows that Banyan Tree Holdings had liabilities of S$471.7m due within a year, and liabilities of S$479.4m falling due after that. Offsetting this, it had S$53.3m in cash and S$61.7m in receivables that were due within 12 months. So it has liabilities totalling S$836.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the S$269.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Banyan Tree Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Banyan Tree Holdings'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, Banyan Tree Holdings made a loss at the EBIT level, and saw its revenue drop to S$158m, which is a fall of 54%. To be frank that doesn't bode well.

Caveat Emptor

While Banyan Tree Holdings'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 S$55m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through S$29m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Banyan Tree Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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