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. Importantly, The Howard Hughes Corporation (NYSE:HHC) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Howard Hughes's Net Debt?
As you can see below, Howard Hughes had US$4.44b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$975.8m in cash, and so its net debt is US$3.46b.
A Look At Howard Hughes' Liabilities
Zooming in on the latest balance sheet data, we can see that Howard Hughes had liabilities of US$795.4m due within 12 months and liabilities of US$4.67b due beyond that. On the other hand, it had cash of US$975.8m and US$468.0m worth of receivables due within a year. So it has liabilities totalling US$4.02b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of US$5.18b. 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 Howard Hughes'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 Howard Hughes had a loss before interest and tax, and actually shrunk its revenue by 36%, to US$715m. To be frank that doesn't bode well.
Not only did Howard Hughes's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$37m. 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. Another cause for caution is that is bled US$86m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. For example, we've discovered 2 warning signs for Howard Hughes (1 can't be ignored!) that you should be aware of before investing here.
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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