Would Chalet Hotels (NSE:CHALET) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Chalet Hotels Limited (NSE:CHALET) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, 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.

Check out our latest analysis for Chalet Hotels

How Much Debt Does Chalet Hotels Carry?

As you can see below, at the end of March 2022, Chalet Hotels had ₹25.3b of debt, up from ₹20.6b a year ago. Click the image for more detail. However, it does have ₹1.15b in cash offsetting this, leading to net debt of about ₹24.2b.

How Healthy Is Chalet Hotels' Balance Sheet?

According to the last reported balance sheet, Chalet Hotels had liabilities of ₹8.61b due within 12 months, and liabilities of ₹22.4b due beyond 12 months. Offsetting this, it had ₹1.15b in cash and ₹436.0m in receivables that were due within 12 months. So its liabilities total ₹29.4b more than the combination of its cash and short-term receivables.

Chalet Hotels has a market capitalization of ₹69.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chalet Hotels's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Chalet Hotels wasn't profitable at an EBIT level, but managed to grow its revenue by 71%, to ₹5.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Chalet Hotels still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₹199m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₹750m into a profit. So to be blunt we do think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Chalet Hotels insider transactions.

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.