Is Country Club Hospitality & Holidays (NSE:CCHHL) Weighed On By Its Debt Load?

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.' 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 Country Club Hospitality & Holidays Limited (NSE:CCHHL) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that CCHHL is potentially overvalued!

How Much Debt Does Country Club Hospitality & Holidays Carry?

You can click the graphic below for the historical numbers, but it shows that Country Club Hospitality & Holidays had ₹2.50b of debt in September 2022, down from ₹3.48b, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Country Club Hospitality & Holidays' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Country Club Hospitality & Holidays had liabilities of ₹1.98b due within 12 months and liabilities of ₹2.54b due beyond that. On the other hand, it had cash of ₹37.6m and ₹385.6m worth of receivables due within a year. So its liabilities total ₹4.10b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹1.34b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to ₹934m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Country Club Hospitality & Holidays's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable ₹250m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₹468m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Country Club Hospitality & Holidays has 2 warning signs (and 1 which is concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.