Is Oriental Hotels (NSE:ORIENTHOT) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Oriental Hotels Limited (NSE:ORIENTHOT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Oriental Hotels

What Is Oriental Hotels's Net Debt?

As you can see below, Oriental Hotels had ₹2.33b of debt at September 2020, down from ₹2.72b a year prior. On the flip side, it has ₹604.0m in cash leading to net debt of about ₹1.73b.

How Healthy Is Oriental Hotels's Balance Sheet?

We can see from the most recent balance sheet that Oriental Hotels had liabilities of ₹794.2m falling due within a year, and liabilities of ₹2.54b due beyond that. On the other hand, it had cash of ₹604.0m and ₹140.4m worth of receivables due within a year. So it has liabilities totalling ₹2.59b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹3.48b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Oriental Hotels will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Oriental Hotels made a loss at the EBIT level, and saw its revenue drop to ₹1.8b, which is a fall of 45%. That makes us nervous, to say the least.

Caveat Emptor

While Oriental Hotels's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₹376m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹125m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Oriental Hotels you should be aware of, and 2 of them are concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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