Dalata Hotel Group (ISE: DHG) has debt but no profit; Should we be worried?

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but the fact that you suffer a 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 can see that Dalata Hotel Group plc (ISE: DHG) uses debt in its business. But the real question is whether this debt makes the business risky.

When Is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Dalata Hotel Group

What is the net debt of the Dalata hotel group?

You can click on the graph below for historical figures, but it shows that Dalata Hotel Group had 347.4 million euros in debt in June 2021, up from 451.6 million euros a year earlier. On the other hand, it has 40.9 million euros in cash, leading to a net debt of around 306.5 million euros.

ISE: DHG History of debt to equity September 26, 2021

A look at the responsibilities of the Dalata hotel group

The most recent balance sheet shows that Dalata Hotel Group had liabilities of 68.9 million euros due within one year and liabilities of 785.8 million euros due beyond. On the other hand, it had cash of € 40.9 million and € 12.7 million in receivables within one year. It therefore has total liabilities of € 801.1 million more than its combined cash and short-term receivables.

This is a mountain of leverage compared to its market capitalization of € 840.2 million. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Dalata Hotel Group’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over 12 months, Dalata Hotel Group recorded a loss in terms of EBIT and saw its turnover fall to € 96 million, a decrease of 69%. It makes us nervous, to say the least.

Emptor Warning

While Dalata Hotel Group’s declining revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. To be precise, the EBIT loss amounted to € 39 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 improve over time. We would feel better if he turned his loss of 68 million euros over twelve months into profit. So, to be frank, we think it’s risky. When we look at a riskier business, we like to see how its profits (or losses) have changed over time. Today we are bringing readers this interactive graph showing the evolution of Dalata Hotel Group’s profit, revenue and operating cash flow over the past few years.

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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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 the mentioned stocks.
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