Is TGB Banquets et Hôtels (NSE: TGBHOTELS) a risky investment?

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Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that TGB Banquets and Hotels Limited (NSE: TGBHOTELS) uses debt in its business. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. 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. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Consult our latest analysis for TGB Banquets and Hotels

What is TGB Banquets and Hotels net debt?

As you can see below, TGB Banquets and Hotels had 118.8 million yen in debt in March 2021, up from 134.0 million yen the previous year. However, given that it has a cash reserve of 6.10 million, its net debt is less, at around 112.7 million.

NSEI: TGBHOTELS History of debt on equity July 4, 2021

How healthy is the balance sheet for TGB’s banquets and hotels?

The latest balance sheet data shows TGB Banquets and Hotels had a liability of 592.7 million yen due within one year, and a liability of 79.8 million yen maturing thereafter. In compensation for these obligations, it had cash of 6.10 million as well as receivables valued at 507.0 million at 12 months. It therefore has liabilities totaling 159.5 million yen more than its combined cash and short-term receivables.

While that may sound like a lot, it’s not so bad as TGB Banquets and Hotels has a market capitalization of 267.7m, and could therefore likely strengthen its balance sheet by raising capital if needed. But we absolutely want to keep our eyes open for indications that its debt is too risky. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since TGB Banquets and Hotels will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

In the past year, TGB Banquets and Hotels recorded a loss before interest and taxes and in fact reduced its revenue by 56%, to 148 million yen. It makes us nervous, to say the least.

Emptor Warning

Not only has TGB Banquets and Hotels revenue declined over the past twelve months, it has also generated negative earnings before interest and taxes (EBIT). Indeed, he lost a very considerable amount of 35 million euros at the EBIT level. 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 be improved over time. However, it doesn’t help that he spent 3.1 million yen in cash in the past year. 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. Example: we have spotted 3 warning signs for TGB Banquets and Hotels you have to be aware of that, and one of them makes us a little uncomfortable.

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. It does not constitute a recommendation to buy or sell any stock 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 material. Simply Wall St has no position in any of the stocks mentioned.
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