David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Hyatt Hotels Corporation (NYSE:H) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
What Is Hyatt Hotels's Net Debt?
As you can see below, at the end of December 2021, Hyatt Hotels had US$3.97b of debt, up from US$3.24b a year ago. Click the image for more detail. However, because it has a cash reserve of US$1.19b, its net debt is less, at about US$2.78b.
A Look At Hyatt Hotels' Liabilities
According to the last reported balance sheet, Hyatt Hotels had liabilities of US$2.23b due within 12 months, and liabilities of US$6.81b due beyond 12 months. Offsetting these obligations, it had cash of US$1.19b as well as receivables valued at US$633.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$7.22b.
This deficit is considerable relative to its market capitalization of US$9.67b, so it does suggest shareholders should keep an eye on Hyatt Hotels' use of debt. 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 Hyatt Hotels'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.
Over 12 months, Hyatt Hotels reported revenue of US$1.4b, which is a gain of 85%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, Hyatt Hotels still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$243m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of US$222m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Hyatt Hotels you should be aware of, and 1 of them is a bit unpleasant.
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.
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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.