Warren Buffett famously said, '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. We note that Hilton Grand Vacations Inc. (NYSE:HGV) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Hilton Grand Vacations Carry?
The image below, which you can click on for greater detail, shows that Hilton Grand Vacations had debt of US$1.85b at the end of March 2021, a reduction from US$2.15b over a year. However, it also had US$400.0m in cash, and so its net debt is US$1.45b.
How Healthy Is Hilton Grand Vacations' Balance Sheet?
We can see from the most recent balance sheet that Hilton Grand Vacations had liabilities of US$231.0m falling due within a year, and liabilities of US$2.51b due beyond that. Offsetting this, it had US$400.0m in cash and US$111.0m in receivables that were due within 12 months. So its liabilities total US$2.23b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of US$3.48b, so it does suggest shareholders should keep an eye on Hilton Grand Vacations' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hilton Grand Vacations's ability to maintain a healthy balance sheet going forward. 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, Hilton Grand Vacations made a loss at the EBIT level, and saw its revenue drop to US$655m, which is a fall of 58%. That makes us nervous, to say the least.
While Hilton Grand Vacations'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$48m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$216m into a profit. So we do think this stock is quite risky. 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. Be aware that Hilton Grand Vacations is showing 2 warning signs in our investment analysis , and 1 of those is significant...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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