David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Event Hospitality & Entertainment Limited (ASX: EVT) has debt on its balance sheet. But should shareholders be worried about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Event Hospitality & Entertainment
What is the debt of Event Hospitality & Entertainment?
The image below, which you can click for more details, shows that as of December 2020, Event Hospitality & Entertainment was in debt of A $ 532.5 million, compared to A $ 405.4 million in one. year. However, he also had A $ 81.3 million in cash, so his net debt is A $ 451.2 million.
A look at the responsibilities of hospitality and event entertainment
The latest balance sheet data shows that Event Hospitality & Entertainment had debts of A $ 370.5 million due within one year, and debts of A $ 1.35 billion due thereafter. In compensation for these obligations, it had cash of A $ 81.3 million as well as receivables valued at A $ 93.4 million maturing within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by AU $ 1.54 billion.
This shortfall is sizable compared to its market cap of A $ 2.00 billion, so he suggests shareholders keep an eye on Event Hospitality & Entertainment’s use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Event Hospitality & Entertainment’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 analyst earnings forecast report interesting.
In the past year, Event Hospitality & Entertainment recorded a loss before interest and taxes and actually reduced revenue by 76%, to A $ 283 million. To be frank, that doesn’t bode well.
Not only has Event Hospitality & Entertainment’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Its loss of EBIT was AU $ 218 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we think the record is far from up to par, although it could be improved over time. However, it doesn’t help that he spent A $ 47million in cash in the past year. Suffice it to say that we consider the action risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 1 warning sign we spotted with Event Hospitality & Entertainment.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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