Stock Analysis

Here's Why Hyatt Hotels (NYSE:H) Can Afford Some Debt

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NYSE:H
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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.' 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 Hyatt Hotels Corporation (NYSE:H) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hyatt Hotels

What Is Hyatt Hotels's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Hyatt Hotels had US$3.24b of debt, an increase on US$2.53b, over one year. However, because it has a cash reserve of US$1.74b, its net debt is less, at about US$1.50b.

debt-equity-history-analysis
NYSE:H Debt to Equity History August 13th 2021

A Look At Hyatt Hotels' Liabilities

Zooming in on the latest balance sheet data, we can see that Hyatt Hotels had liabilities of US$1.02b due within 12 months and liabilities of US$5.04b due beyond that. On the other hand, it had cash of US$1.74b and US$360.0m worth of receivables due within a year. So it has liabilities totalling US$3.96b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hyatt Hotels has a market capitalization of US$7.38b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hyatt Hotels can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hyatt Hotels made a loss at the EBIT level, and saw its revenue drop to US$760m, which is a fall of 56%. That makes us nervous, to say the least.

Caveat Emptor

While Hyatt Hotels'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$604m. 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 US$410m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Hyatt Hotels (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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What are the risks and opportunities for Hyatt Hotels?

Hyatt Hotels Corporation operates as a hospitality company in the United States and internationally.

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Rewards

  • Earnings are forecast to grow 21.99% per year

  • Became profitable this year

Risks

  • Interest payments are not well covered by earnings

  • Significant insider selling over the past 3 months

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