Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Lampsa Hellenic Hotels S.A. (ATH:LAMPS) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
View our latest analysis for Lampsa Hellenic Hotels
How Much Debt Does Lampsa Hellenic Hotels Carry?
The image below, which you can click on for greater detail, shows that at December 2018 Lampsa Hellenic Hotels had debt of €96.3m, up from €68.5m in one year. However, because it has a cash reserve of €8.31m, its net debt is less, at about €88.0m.
A Look At Lampsa Hellenic Hotels's Liabilities
According to the last reported balance sheet, Lampsa Hellenic Hotels had liabilities of €90.5m due within 12 months, and liabilities of €31.7m due beyond 12 months. Offsetting these obligations, it had cash of €8.31m as well as receivables valued at €7.31m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €106.6m.
This deficit isn't so bad because Lampsa Hellenic Hotels is worth €416.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.