Indian Hotels (NSE:INDHOTEL) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that The Indian Hotels Company Limited (NSE:INDHOTEL) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Indian Hotels

What Is Indian Hotels's Debt?

You can click the graphic below for the historical numbers, but it shows that Indian Hotels had ₹19.8b of debt in March 2022, down from ₹36.3b, one year before. But it also has ₹20.9b in cash to offset that, meaning it has ₹1.06b net cash.

A Look At Indian Hotels' Liabilities

According to the last reported balance sheet, Indian Hotels had liabilities of ₹19.6b due within 12 months, and liabilities of ₹34.7b due beyond 12 months. On the other hand, it had cash of ₹20.9b and ₹3.46b worth of receivables due within a year. So its liabilities total ₹30.0b more than the combination of its cash and short-term receivables.

Of course, Indian Hotels has a market capitalization of ₹356.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Indian Hotels also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Indian Hotels made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹283m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Indian Hotels can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Indian Hotels may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Indian Hotels actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Indian Hotels's liabilities, but we can be reassured by the fact it has has net cash of ₹1.06b. The cherry on top was that in converted 1,245% of that EBIT to free cash flow, bringing in ₹3.5b. So we don't have any problem with Indian Hotels's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Indian Hotels .

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.