Apollo Sindoori Hotels (NSE:APOLSINHOT) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Apollo Sindoori Hotels Limited (NSE:APOLSINHOT) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Apollo Sindoori Hotels

What Is Apollo Sindoori Hotels's Net Debt?

As you can see below, at the end of September 2022, Apollo Sindoori Hotels had ₹520.7m of debt, up from ₹71.9m a year ago. Click the image for more detail. But on the other hand it also has ₹684.9m in cash, leading to a ₹164.2m net cash position.

How Strong Is Apollo Sindoori Hotels' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Apollo Sindoori Hotels had liabilities of ₹438.1m due within 12 months and liabilities of ₹692.5m due beyond that. Offsetting this, it had ₹684.9m in cash and ₹508.3m in receivables that were due within 12 months. So it can boast ₹62.5m more liquid assets than total liabilities.

This surplus suggests that Apollo Sindoori Hotels has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Apollo Sindoori Hotels boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Apollo Sindoori Hotels's EBIT shot up like bamboo after rain, gaining 69% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Apollo Sindoori Hotels's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Apollo Sindoori Hotels has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Apollo Sindoori Hotels actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Apollo Sindoori Hotels has net cash of ₹164.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 188% of that EBIT to free cash flow, bringing in ₹141m. So is Apollo Sindoori Hotels's debt a risk? It doesn't seem so to us. 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 3 warning signs with Apollo Sindoori Hotels (at least 2 which shouldn't be ignored) , 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.

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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.