Red Lion Hotels Inc (NYSE: RLH) has debt but no revenue; Should you be worried?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Red Lion Hotels Corporation (New York Stock Exchange: RLH) has a debt on its balance sheet. But should shareholders worry about its use of debt?
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
How much debt does Red Lion Hotels have?
As you can see below, Red Lion Hotels had US$5.58 million in debt as of June 2020, up from US$56.5 million the previous year. But on the other hand, he also has $33.7 million in cash, resulting in a net cash position of $28.1 million.
How strong is Red Lion Hotels’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Red Lion Hotels had liabilities of US$17.1 million due within 12 months and liabilities of US$6.72 million due beyond. In compensation for these obligations, it had cash of US$33.7 million as well as receivables valued at US$11.7 million and maturing within 12 months. So he actually has $21.6 million After liquid assets than total liabilities.
This excess cash is a great indication that Red Lion Hotels’ balance sheet is as strong as the racists are weak. From this perspective, lenders should feel as secure as the beloved of a black belt karate master. In short, Red Lion Hotels has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Red Lion Hotels can strengthen its balance sheet over time. So if you want to see what the pros think, you might find this free analyst earnings forecast report Be interesting.
Last year, Red Lion Hotels recorded a loss before interest and taxes and actually reduced its revenue by 27%, to $87 million. It makes us nervous, to say the least.
So how risky are Red Lion hotels?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And over the past year, Red Lion Hotels has posted a loss in earnings before interest and taxes (EBIT), if truth be told. Indeed, during this period, it burned $6.9 million in cash and suffered a loss of $23.8 million. Given that it only has net cash of $28.1 million, the company may need to raise more capital if it doesn’t break even soon. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Take for example the ubiquitous specter of investment risk. We have identified 3 warning signs with Red Lion Hotels and understanding them should be part of your investment process.
If after all this you are more interested in a fast growing company with a strong balance sheet, then check out our list of net cash growth stocks without delay.
This Simply Wall St article is general in nature. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.