Playa Hotels & Resorts (NASDAQ:PLYA) Is Making Moderate Use Of Debt

Warren Buffett famously said, '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, Playa Hotels & Resorts N.V. (NASDAQ:PLYA) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Playa Hotels & Resorts

What Is Playa Hotels & Resorts's Debt?

As you can see below, Playa Hotels & Resorts had US$1.17b of debt at June 2021, down from US$1.31b a year prior. However, it does have US$237.7m in cash offsetting this, leading to net debt of about US$935.1m.

How Healthy Is Playa Hotels & Resorts' Balance Sheet?

We can see from the most recent balance sheet that Playa Hotels & Resorts had liabilities of US$105.6m falling due within a year, and liabilities of US$1.30b due beyond that. On the other hand, it had cash of US$237.7m and US$43.3m worth of receivables due within a year. So it has liabilities totalling US$1.12b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$1.48b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Playa Hotels & Resorts's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Playa Hotels & Resorts had a loss before interest and tax, and actually shrunk its revenue by 34%, to US$299m. That makes us nervous, to say the least.

Caveat Emptor

While Playa Hotels & Resorts's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$124m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$123m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Playa Hotels & Resorts .

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.

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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