Here's Why Apollo Sindoori Hotels (NSE:APOLSINHOT) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Apollo Sindoori Hotels Limited (NSE:APOLSINHOT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, 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 Sindoori Hotels

What Is Apollo Sindoori Hotels's Net Debt?

The image below, which you can click on for greater detail, shows that Apollo Sindoori Hotels had debt of ₹642.1m at the end of March 2024, a reduction from ₹1.05b over a year. However, it does have ₹1.11b in cash offsetting this, leading to net cash of ₹469.9m.

How Healthy Is Apollo Sindoori Hotels' Balance Sheet?

The latest balance sheet data shows that Apollo Sindoori Hotels had liabilities of ₹1.42b due within a year, and liabilities of ₹387.3m falling due after that. Offsetting these obligations, it had cash of ₹1.11b as well as receivables valued at ₹990.8m due within 12 months. So it can boast ₹294.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Apollo Sindoori Hotels could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Apollo Sindoori Hotels boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Apollo Sindoori Hotels grew its EBIT by 62% over the last twelve months, and that growth will make it easier to handle its debt. 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 Sindoori Hotels'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Apollo Sindoori Hotels may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Apollo Sindoori Hotels reported free cash flow worth 20% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Apollo Sindoori Hotels has ₹469.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 62% over the last year. So we don't have any problem with Apollo Sindoori Hotels's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Apollo Sindoori Hotels 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com