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

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.' 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. As with many other companies The Indian Hotels Company Limited (NSE:INDHOTEL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 the opportunities and risks within the IN Hospitality industry.

What Is Indian Hotels's Debt?

The image below, which you can click on for greater detail, shows that Indian Hotels had debt of ₹7.69b at the end of September 2022, a reduction from ₹40.8b over a year. However, its balance sheet shows it holds ₹11.7b in cash, so it actually has ₹3.98b net cash.

How Strong Is Indian Hotels' Balance Sheet?

The latest balance sheet data shows that Indian Hotels had liabilities of ₹19.7b due within a year, and liabilities of ₹24.9b falling due after that. Offsetting this, it had ₹11.7b in cash and ₹3.71b in receivables that were due within 12 months. So it has liabilities totalling ₹29.2b more than its cash and near-term receivables, combined.

Given Indian Hotels has a market capitalization of ₹465.9b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Indian Hotels boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Indian Hotels made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹7.8b in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Indian 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Indian Hotels actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 ₹3.98b. And it impressed us with free cash flow of ₹9.3b, being 120% of its EBIT. So we are not troubled with Indian Hotels's debt use. There's no doubt that we learn most about debt from the balance sheet. 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 .

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. 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.