David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that BTG Hotels (Group) Co., Ltd. (SHSE:600258) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses 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 and debt together.
What Is BTG Hotels (Group)'s Debt?
The image below, which you can click on for greater detail, shows that BTG Hotels (Group) had debt of CN¥2.20b at the end of March 2024, a reduction from CN¥2.86b over a year. However, its balance sheet shows it holds CN¥2.51b in cash, so it actually has CN¥301.0m net cash.
A Look At BTG Hotels (Group)'s Liabilities
The latest balance sheet data shows that BTG Hotels (Group) had liabilities of CN¥4.65b due within a year, and liabilities of CN¥9.61b falling due after that. Offsetting these obligations, it had cash of CN¥2.51b as well as receivables valued at CN¥591.1m due within 12 months. So it has liabilities totalling CN¥11.2b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of CN¥15.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, BTG Hotels (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably, BTG Hotels (Group)'s EBIT launched higher than Elon Musk, gaining a whopping 856% on last year. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if BTG Hotels (Group) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. BTG Hotels (Group) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, BTG Hotels (Group) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
Although BTG Hotels (Group)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥301.0m. The cherry on top was that in converted 302% of that EBIT to free cash flow, bringing in CN¥3.1b. So we are not troubled with BTG Hotels (Group)'s debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with BTG Hotels (Group) .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.