Is Apollo Tourism & Leisure (ASX:ATL) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Apollo Tourism & Leisure Ltd (ASX:ATL) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Apollo Tourism & Leisure

How Much Debt Does Apollo Tourism & Leisure Carry?

The image below, which you can click on for greater detail, shows that Apollo Tourism & Leisure had debt of AU$139.0m at the end of June 2021, a reduction from AU$156.1m over a year. However, because it has a cash reserve of AU$45.5m, its net debt is less, at about AU$93.5m.

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

Zooming in on the latest balance sheet data, we can see that Apollo Tourism & Leisure had liabilities of AU$163.0m due within 12 months and liabilities of AU$155.3m due beyond that. On the other hand, it had cash of AU$45.5m and AU$3.88m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$268.9m.

The deficiency here weighs heavily on the AU$139.6m 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'd watch its balance sheet closely, without a doubt. After all, Apollo Tourism & Leisure would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Apollo Tourism & Leisure can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Apollo Tourism & Leisure had a loss before interest and tax, and actually shrunk its revenue by 20%, to AU$293m. To be frank that doesn't bode well.

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$17m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of AU$18m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Apollo Tourism & Leisure , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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