Is Byke Hospitality (NSE:BYKE) Weighed On By Its Debt Load?

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.' 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 The Byke Hospitality Limited (NSE:BYKE) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Byke Hospitality

What Is Byke Hospitality's Debt?

As you can see below, Byke Hospitality had ₹203.3m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹241.9m in cash, so it actually has ₹38.6m net cash.

A Look At Byke Hospitality's Liabilities

We can see from the most recent balance sheet that Byke Hospitality had liabilities of ₹350.2m falling due within a year, and liabilities of ₹556.1m due beyond that. Offsetting these obligations, it had cash of ₹241.9m as well as receivables valued at ₹220.6m due within 12 months. So it has liabilities totalling ₹443.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Byke Hospitality is worth ₹828.0m, 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. Despite its noteworthy liabilities, Byke Hospitality boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Byke Hospitality'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, Byke Hospitality made a loss at the EBIT level, and saw its revenue drop to ₹856m, which is a fall of 38%. To be frank that doesn't bode well.

So How Risky Is Byke Hospitality?

While Byke Hospitality lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₹96m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Byke Hospitality (1 shouldn't be ignored) you should be aware of.

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. 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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