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. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Royal Orchid Limited Hotels (NSE: ROHLTD) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.
Check out our latest review for Royal Orchid hotels
What is Royal Orchid Hotels net debt?
The image below, which you can click for more details, shows that in March 2021, Royal Orchid Hotels was in debt of 1.51 billion yen, up from 1.42 billion yen in a year. On the other hand, it has 485.4 million yen in cash, resulting in net debt of around 1.03 billion yen.
A look at the responsibilities of Royal Orchid hotels
We can see from the most recent balance sheet that Royal Orchid Hotels had liabilities of 1.01 billion yen due within one year and liabilities of 1.45 billion yen beyond. In return, he had 485.4 million in cash and 111.2 million in receivables due within 12 months. It therefore has liabilities totaling 1.86 billion yen more than its combined cash and short-term receivables.
This is a mountain of leverage compared to its market cap of 2.01 billion yen. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Royal Orchid Hotels that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Over 12 months, Royal Orchid Hotels recorded a loss in EBIT and saw its turnover fall to 910 million, a decrease of 43%. It makes us nervous, to say the least.
While Royal Orchid Hotels’ decline in revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Its EBIT loss was 256 million yen. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. We’d be better off if he turned his 12-month 301 million yen loss into profit. So we think this title is quite risky. 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, Royal Orchid Hotels has 3 warning signs (and 1 which is of concern) we think you should be aware of.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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