Stock Analysis

Hotel Royal (SGX:H12) Is Carrying A Fair Bit Of Debt

SGX:H12
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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.' 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 Hotel Royal Limited (SGX:H12) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

See our latest analysis for Hotel Royal

What Is Hotel Royal's Net Debt?

As you can see below, at the end of December 2020, Hotel Royal had S$127.5m of debt, up from S$115.4m a year ago. Click the image for more detail. On the flip side, it has S$28.1m in cash leading to net debt of about S$99.5m.

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SGX:H12 Debt to Equity History March 30th 2021

A Look At Hotel Royal's Liabilities

We can see from the most recent balance sheet that Hotel Royal had liabilities of S$17.9m falling due within a year, and liabilities of S$141.1m due beyond that. On the other hand, it had cash of S$28.1m and S$13.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$117.6m.

Hotel Royal has a market capitalization of S$283.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hotel Royal'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.

Over 12 months, Hotel Royal made a loss at the EBIT level, and saw its revenue drop to S$31m, which is a fall of 47%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hotel Royal's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at S$14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through S$6.4m of cash over the last year. So to be blunt we think it is risky. 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. For example, we've discovered 1 warning sign for Hotel Royal that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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