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

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. We note that Country Club Hospitality & Holidays Limited (NSE:CCHHL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Country Club Hospitality & Holidays

How Much Debt Does Country Club Hospitality & Holidays Carry?

The image below, which you can click on for greater detail, shows that Country Club Hospitality & Holidays had debt of ₹237.5m at the end of March 2024, a reduction from ₹1.23b over a year. However, because it has a cash reserve of ₹15.8m, its net debt is less, at about ₹221.7m.

A Look At Country Club Hospitality & Holidays' Liabilities

We can see from the most recent balance sheet that Country Club Hospitality & Holidays had liabilities of ₹1.29b falling due within a year, and liabilities of ₹1.75b due beyond that. On the other hand, it had cash of ₹15.8m and ₹208.6m worth of receivables due within a year. So its liabilities total ₹2.81b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹4.23b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Country Club Hospitality & Holidays 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.

In the last year Country Club Hospitality & Holidays had a loss before interest and tax, and actually shrunk its revenue by 49%, to ₹686m. That makes us nervous, to say the least.

Caveat Emptor

While Country Club Hospitality & Holidays's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹197k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹92m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Country Club Hospitality & Holidays (including 2 which are concerning) .

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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