Ambassador HotelLtd (TPE:2704) Has Debt But No Earnings; Should You Worry?

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.' 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 The Ambassador Hotel,Ltd. (TPE:2704) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ambassador HotelLtd

What Is Ambassador HotelLtd's Net Debt?

As you can see below, at the end of September 2020, Ambassador HotelLtd had NT$442.0m of debt, up from NT$354.0m a year ago. Click the image for more detail. But on the other hand it also has NT$3.56b in cash, leading to a NT$3.12b net cash position.

A Look At Ambassador HotelLtd's Liabilities

The latest balance sheet data shows that Ambassador HotelLtd had liabilities of NT$1.23b due within a year, and liabilities of NT$202.1m falling due after that. On the other hand, it had cash of NT$3.56b and NT$74.3m worth of receivables due within a year. So it actually has NT$2.20b more liquid assets than total liabilities.

This surplus suggests that Ambassador HotelLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Ambassador HotelLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ambassador HotelLtd'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, Ambassador HotelLtd made a loss at the EBIT level, and saw its revenue drop to NT$2.2b, which is a fall of 24%. To be frank that doesn't bode well.

So How Risky Is Ambassador HotelLtd?

While Ambassador HotelLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$100m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Be aware that Ambassador HotelLtd is showing 3 warning signs in our investment analysis , and 1 of those can'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.

When trading Ambassador HotelLtd or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.