Is KHFM Hospitality and Facility Management Services (NSE:KHFM) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that KHFM Hospitality and Facility Management Services Limited (NSE:KHFM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for KHFM Hospitality and Facility Management Services

What Is KHFM Hospitality and Facility Management Services's Net Debt?

As you can see below, at the end of March 2022, KHFM Hospitality and Facility Management Services had ₹467.3m of debt, up from ₹361.8m a year ago. Click the image for more detail. However, it does have ₹97.6m in cash offsetting this, leading to net debt of about ₹369.7m.

A Look At KHFM Hospitality and Facility Management Services' Liabilities

Zooming in on the latest balance sheet data, we can see that KHFM Hospitality and Facility Management Services had liabilities of ₹531.5m due within 12 months and liabilities of ₹148.1m due beyond that. On the other hand, it had cash of ₹97.6m and ₹170.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹411.0m.

Given this deficit is actually higher than the company's market capitalization of ₹409.9m, we think shareholders really should watch KHFM Hospitality and Facility Management Services's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KHFM Hospitality and Facility Management Services will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year KHFM Hospitality and Facility Management Services had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₹964m. That's not what we would hope to see.

Caveat Emptor

While KHFM Hospitality and Facility Management Services'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 ₹159m 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. It's fair to say the loss of ₹192m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that KHFM Hospitality and Facility Management Services is showing 3 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.