Howard Marks put it well when he said that instead of worrying about stock price volatility, “the possibility of permanent loss is the risk that worries me…and every business investor I know worries about.” It’s only natural to look at a company’s balance sheet when examining how risky it is, since debt is often involved when a company goes down. More important , Playa NV . Hotels & Resorts (NASDAQ: PLYA) is in debt. But the real question is whether this debt makes the company too risky.
Why does debt bring risks?
Debt is a tool to help businesses grow, but if the company is unable to repay the loans to the lenders, it is at their mercy. Ultimately, if the company cannot meet its statutory debt-repayment obligations, the shareholders can give up anything. However, the more frequent (but still costly) occurrence is where a company must issue shares at bargain low prices, permanently weakening shareholders, just to prop up its balance sheet. By replacing dilution, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a company’s use of debt, we first look at cash and debt together.
How Much Debt Do Playa Hotels & Resorts Have?
As you can see below, Playa Dion Hotels & Resorts had $1.17 billion in September 2021, down from $1.30 a year earlier. However, she also had $231.5 million in cash, thus her net debt is $934.4 million.
Nasdaq GS: PLYA Debt to Equity History November 25, 2021
How strong is the balance sheet of the Playa Hotels & Resorts group?
According to the latest reported balance sheet, Playa Hotels & Resorts had liabilities of $95.3 million maturing within 12 months, and liabilities of $1.30 billion maturing 12 months. On the other hand, it had cash of $231.5 million and $44.6 million of accounts receivable within a year. So it has liabilities totaling $1.12 billion more than cash and near-term debtors, combined.
This is a mountain of leverage relative to its market capitalization of $1.26 billion. This indicates that shareholders will dilute heavily if the company needs to shore up its balance sheet quickly. There is no doubt that we learn more about debt from the balance sheet. But future earnings, more than anything else, will determine the ability of Playa Hotels & Resorts to maintain a healthy balance sheet in the future. So if you focus on the future, you can check it out Free Report showing analyst earnings forecasts.
Over the 12-month period, Playa Hotels & Resorts reported revenue of $421 million, which is a 21% increase, although it did not report any EBIT. Shareholders will likely have crossed their fingers so that it could work its way into profits.
Although Playa Hotels and Resorts has deftly grown their top streak, the harsh reality is that they lose money on the EBIT line. Specifically, the EBIT loss came in at $63 million. Given that besides the above obligations does not give us much confidence that the company should use a lot of debt. Frankly, we think the balance sheet is a far cry from matching, although it could be improved over time. However, it doesn’t help that he’s drained $73 million of cash over the past year. So suffice it to say that we consider the stock to be very risky. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. For example, we have defined One warning sign for Playa Hotels & Resorts which you should be aware of.
At the end of the day, it is often best to focus on companies that are free of net debt. You can access our list of these companies (they all have a proven track record of earnings growth). It’s free.
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