Is Byke Hospitality (NSE:BYKE) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, The Byke Hospitality Limited (NSE:BYKE) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 Byke Hospitality

What Is Byke Hospitality's Debt?

The chart below, which you can click on for greater detail, shows that Byke Hospitality had ₹267.3m in debt in March 2022; about the same as the year before. On the flip side, it has ₹51.0m in cash leading to net debt of about ₹216.2m.

How Healthy Is Byke Hospitality's Balance Sheet?

The latest balance sheet data shows that Byke Hospitality had liabilities of ₹352.6m due within a year, and liabilities of ₹703.8m falling due after that. Offsetting this, it had ₹51.0m in cash and ₹281.4m in receivables that were due within 12 months. So it has liabilities totalling ₹724.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Byke Hospitality is worth ₹1.23b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Byke Hospitality will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Byke Hospitality wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to ₹933m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Byke Hospitality managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₹66m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₹128m into a profit. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Byke Hospitality you should be aware of, and 1 of them doesn't sit too well with us.

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.