Is Asian Hotels (East) (NSE:AHLEAST) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Asian Hotels (East) Limited (NSE:AHLEAST) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Asian Hotels (East)

What Is Asian Hotels (East)'s Net Debt?

As you can see below, Asian Hotels (East) had ₹1.04b of debt at March 2021, down from ₹1.14b a year prior. However, its balance sheet shows it holds ₹1.16b in cash, so it actually has ₹110.8m net cash.

A Look At Asian Hotels (East)'s Liabilities

The latest balance sheet data shows that Asian Hotels (East) had liabilities of ₹934.5m due within a year, and liabilities of ₹1.13b falling due after that. On the other hand, it had cash of ₹1.16b and ₹121.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹789.2m.

This deficit isn't so bad because Asian Hotels (East) is worth ₹2.40b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Asian Hotels (East) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Asian Hotels (East)'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.

In the last year Asian Hotels (East) had a loss before interest and tax, and actually shrunk its revenue by 71%, to ₹544m. To be frank that doesn't bode well.

So How Risky Is Asian Hotels (East)?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Asian Hotels (East) had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₹122m of cash and made a loss of ₹330m. While this does make the company a bit risky, it's important to remember it has net cash of ₹110.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Asian Hotels (East) (of which 1 is concerning!) 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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