Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Meliá Hotels International, SA (BME: MEL) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Meliá Hotels International
What is the debt of Meliá Hotels International?
You can click on the graph below for historical figures, but it shows that in June 2021, Meliá Hotels International had a debt of 1.38 billion euros, an increase from 1.22 billion euros. euros, over one year. However, it has 118.1 million euros in cash offsetting this, which leads to net debt of around 1.27 billion euros.
How healthy is Meliá Hotels International’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Meliá Hotels International had a liability of € 751.0 million due within 12 months and a liability of € 3.01 billion due beyond. In return, he had € 118.1 million in cash and € 186.9 million in receivables due within 12 months. Its liabilities thus exceed the sum of its cash and its (short-term) receivables by 3.45 billion euros.
The deficit here weighs heavily on the € 1.49 billion company itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We therefore believe that shareholders should watch it closely. After all, Meliá Hotels International would likely need a major recapitalization if it were to pay its creditors today. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Meliá Hotels International can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
In the past year, Meliá Hotels International recorded a loss before interest and taxes and in fact reduced its revenue by 65%, to 439 million euros. It makes us nervous, to say the least.
Emptor Warning
Not only has Meliá Hotels International’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Its EBIT loss amounted to € 309 million. Considering that aside from the liabilities mentioned above, we are nervous about the business. It would have to improve its operation quickly for us to take an interest in it. Notably because it had negative free cash flow of 210 million euros over the past twelve months. That means it’s on the risky side of things. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 1 warning sign for Meliá Hotels International that you need to be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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