Here’s why Howard Hughes (NYSE: HHC) can get into debt

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” 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. Mostly, The Howard Hughes Society (NYSE: HHC) carries debt. But the most important question is: what risk does this debt create?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest review for Howard Hughes

What is Howard Hughes’ net debt?

As you can see below, Howard Hughes owed $ 4.44 billion in debt, as of March 2021, which is roughly the same as the year before. You can click on the graph for more details. However, he also had $ 975.8 million in cash, so his net debt is $ 3.46 billion.

NYSE: HHC Debt to Equity History July 8, 2021

A look at the responsibilities of Howard Hughes

Zooming in on the latest balance sheet data, we can see that Howard Hughes had a liability of US $ 795.4 million owed within 12 months and a liability of US $ 4.67 billion beyond. On the other hand, it had US $ 975.8 million in cash and US $ 468.0 million in receivables due within one year. It therefore has liabilities totaling US $ 4.02 billion more than its cash and short-term receivables combined.

This is a mountain of leverage compared to its market cap of US $ 5.18 billion. 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 future profits, more than anything, that will determine Howard Hughes’ 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 the past year, Howard Hughes has incurred a loss before interest and taxes and has actually reduced his income by 36%, to $ 715 million. To be frank, that doesn’t bode well.

Emptor Warning

Not only has Howard Hughes’ revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to US $ 37 million. 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. Another reason for caution, US $ 86 million of negative free cash flow has been bled over the past twelve months. Suffice it to say that we consider the action risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 2 warning signs for Howard Hughes (1 cannot be ignored!) Which you should be aware of before investing here.

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 net growth stocks today.

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This Simply Wall St article is general in nature. 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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