These 4 Measures Indicate That Apollo Sindoori Hotels (NSE:APOLSINHOT) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Apollo Sindoori Hotels Limited (NSE:APOLSINHOT) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Apollo Sindoori Hotels

What Is Apollo Sindoori Hotels's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Apollo Sindoori Hotels had ₹615.6m of debt, an increase on ₹570.2m, over one year. However, its balance sheet shows it holds ₹985.3m in cash, so it actually has ₹369.7m net cash.

How Healthy Is Apollo Sindoori Hotels' Balance Sheet?

According to the last reported balance sheet, Apollo Sindoori Hotels had liabilities of ₹1.40b due within 12 months, and liabilities of ₹401.5m due beyond 12 months. Offsetting these obligations, it had cash of ₹985.3m as well as receivables valued at ₹1.05b due within 12 months. So it actually has ₹236.3m 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. Simply put, the fact that Apollo Sindoori Hotels has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Apollo Sindoori Hotels's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Apollo Sindoori Hotels 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.

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. In the last three years, Apollo Sindoori Hotels created free cash flow amounting to 3.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Apollo Sindoori Hotels has net cash of ₹369.7m, as well as more liquid assets than liabilities. So we are not troubled with Apollo Sindoori Hotels's debt use. 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 Apollo Sindoori Hotels (of which 1 is concerning!) 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.

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

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.