Is Asian Hotels (North) (NSE:ASIANHOTNR) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Asian Hotels (North) Limited (NSE:ASIANHOTNR) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Asian Hotels (North)

How Much Debt Does Asian Hotels (North) Carry?

As you can see below, at the end of March 2021, Asian Hotels (North) had ₹12.6b of debt, up from ₹12.1b a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Asian Hotels (North)'s Balance Sheet?

The latest balance sheet data shows that Asian Hotels (North) had liabilities of ₹5.09b due within a year, and liabilities of ₹10.4b falling due after that. Offsetting these obligations, it had cash of ₹47.5m as well as receivables valued at ₹154.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹15.3b.

This deficit casts a shadow over the ₹1.44b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Asian Hotels (North) would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Asian Hotels (North)'s earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Asian Hotels (North) made a loss at the EBIT level, and saw its revenue drop to ₹774m, which is a fall of 62%. To be frank that doesn't bode well.

Caveat Emptor

While Asian Hotels (North)'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 ₹385m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₹7.1b in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Asian Hotels (North) (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.
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