Is Hyatt Hotels (NYSE:H) a risky investment?

Li Lu, an external fund manager backed by Berkshire Hathaway’s Charlie Munger, says, “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.” It has even been stated. It’s only natural to consider a company’s balance sheet when you consider how risky it is, since debt is often involved when a business collapses. Points to keep in mind are: Hyatt Hotels Corporation (NYSE:H) has debt on its balance sheet. But should shareholders be worried about its use of debt?

What risks does debt pose?

Generally, debt only becomes a real problem if a company cannot easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company may go bankrupt if it is unable to pay its creditors. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. Of course, many companies use debt to fund growth, and there are no negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Hyatt Hotels.

What is Hyatt Hotels’ debt?

As you can see below, Hyatt Hotels’ debt was US$3.05b at September 2023, down from US$3.8b in the prior-year period. However, it has cash reserves of US$727m, so its net debt is less than that, at around US$2.32b.

How healthy is Hyatt Hotels’ balance sheet?

The most recent balance sheet shows that Hyatt Hotels had liabilities of US$2.41b falling due within a year, and liabilities of US$6.32b falling due beyond that. Masu. Offsetting this, it had cash of US$727m and receivables of US$762m due within 12 months. So its liabilities outweigh the sum of its cash and (short-term) receivables by US$7.24b.

Hyatt Hotels has a large market capitalization of US$13.2b, so it’s very likely that it will raise cash to shore up its balance sheet if the need arises. However, it’s still worth carefully considering the company’s ability to repay its debt.

We use two main ratios to determine debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), and the second is how much earnings before interest and tax (EBIT) covers interest expense (or interest cover, for short). It’s about how many times you cover it. . Therefore, we consider debt relative to earnings, with or without depreciation.

Hyatt Hotels’ debt-to-EBITDA ratio is 3.0, with EBIT covering interest expense 5.5 times. This suggests that debt levels are significant, but not problematic. It’s also relevant to note that Hyatt Hotels grew its EBIT by a respectable 22% last year, strengthening its ability to repay its debt. The balance sheet is clearly the area to focus on when analyzing debt. However, it is future earnings, more than anything else, that will determine whether Hyatt Hotels can maintain a healthy balance sheet going forward.If you’re focused on the future, check this out free A report showing analyst profit forecasts.

Finally, while tax preparers may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of his EBIT that is matched by actual free cash flow. Over the past two years, Hyatt Hotels actually generated more free cash flow than its EBIT. This kind of powerful redemption excites us as much as the audience at a Daft Punk concert when the beat drops.

our view

Hyatt Hotels’ conversion of EBIT to free cash flow suggests that it can handle debt as easily as Cristiano Ronaldo scores goals from an under-14 goalkeeper. But on a darker note, we’re a bit concerned about its net debt to EBITDA. Taking all the aforementioned factors together, we can see that Hyatt Hotels can handle its debt fairly easily. Of course, this leverage can improve return on equity, but it also brings more risk, so it’s worth noting this. There’s no question that we learn most about debt from the balance sheet. Ultimately, however, any company can contain risks that exist outside the balance sheet.For example, the Hyatt Hotel two warning signs I think you should know.

After all, it may be easier to focus on companies that don’t even need to take on debt.Readers can access a list of growth stocks with zero net debt completely freeright now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.