Indian Hotels (NSE:INDHOTEL) Is Carrying A Fair Bit Of 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies The Indian Hotels Company Limited (NSE:INDHOTEL) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Indian Hotels

What Is Indian Hotels's Debt?

As you can see below, at the end of March 2021, Indian Hotels had ₹55.2b of debt, up from ₹45.0b a year ago. Click the image for more detail. However, it also had ₹6.02b in cash, and so its net debt is ₹49.2b.

A Look At Indian Hotels' Liabilities

We can see from the most recent balance sheet that Indian Hotels had liabilities of ₹29.5b falling due within a year, and liabilities of ₹42.8b due beyond that. On the other hand, it had cash of ₹6.02b and ₹3.35b worth of receivables due within a year. So its liabilities total ₹62.9b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Indian Hotels has a market capitalization of ₹179.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Indian Hotels can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Indian Hotels had a loss before interest and tax, and actually shrunk its revenue by 48%, to ₹19b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Indian Hotels's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹5.5b. 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. However, it doesn't help that it burned through ₹5.3b of cash over the last year. So to be blunt we think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Indian Hotels's profit, revenue, and operating cashflow have changed over the last few years.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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