Does Apollo Tourism & Leisure (ASX:ATL) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Apollo Tourism & Leisure Ltd (ASX:ATL) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Apollo Tourism & Leisure

What Is Apollo Tourism & Leisure's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Apollo Tourism & Leisure had AU$132.5m of debt, an increase on AU$77.5m, over one year. However, it also had AU$37.8m in cash, and so its net debt is AU$94.7m.

How Healthy Is Apollo Tourism & Leisure's Balance Sheet?

We can see from the most recent balance sheet that Apollo Tourism & Leisure had liabilities of AU$150.5m falling due within a year, and liabilities of AU$162.4m due beyond that. Offsetting these obligations, it had cash of AU$37.8m as well as receivables valued at AU$3.97m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$271.1m.

The deficiency here weighs heavily on the AU$87.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Apollo Tourism & Leisure would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Apollo Tourism & Leisure's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Apollo Tourism & Leisure had a loss before interest and tax, and actually shrunk its revenue by 13%, to AU$330m. That's not what we would hope to see.

Caveat Emptor

While Apollo Tourism & Leisure'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 AU$40m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost AU$80m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Apollo Tourism & Leisure is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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