Is Country Club Hospitality & Holidays (NSE:CCHHL) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Country Club Hospitality & Holidays Limited (NSE:CCHHL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Country Club Hospitality & Holidays

What Is Country Club Hospitality & Holidays's Net Debt?

As you can see below, Country Club Hospitality & Holidays had ₹1.77b of debt at September 2020, down from ₹3.53b a year prior. However, because it has a cash reserve of ₹64.4m, its net debt is less, at about ₹1.71b.

A Look At Country Club Hospitality & Holidays's Liabilities

The latest balance sheet data shows that Country Club Hospitality & Holidays had liabilities of ₹2.20b due within a year, and liabilities of ₹3.13b falling due after that. Offsetting this, it had ₹64.4m in cash and ₹396.5m in receivables that were due within 12 months. So it has liabilities totalling ₹4.87b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₹832.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Country Club Hospitality & Holidays 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 Country Club Hospitality & Holidays'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.

In the last year Country Club Hospitality & Holidays had a loss before interest and tax, and actually shrunk its revenue by 63%, to ₹817m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Country Club Hospitality & Holidays's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹424m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of ₹917m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. Take risks, for example - Country Club Hospitality & Holidays has 3 warning signs (and 1 which can't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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