Is Oriental Hotels (NSE:ORIENTHOT) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Oriental Hotels Limited (NSE:ORIENTHOT) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Oriental Hotels

What Is Oriental Hotels's Debt?

You can click the graphic below for the historical numbers, but it shows that Oriental Hotels had ₹2.33b of debt in September 2020, down from ₹2.86b, one year before. However, because it has a cash reserve of ₹604.0m, its net debt is less, at about ₹1.73b.

How Strong Is Oriental Hotels' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Oriental Hotels had liabilities of ₹794.2m due within 12 months and liabilities of ₹2.54b due beyond that. On the other hand, it had cash of ₹604.0m and ₹140.4m worth of receivables due within a year. So it has liabilities totalling ₹2.59b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹4.19b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Oriental Hotels'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.

Over 12 months, Oriental Hotels made a loss at the EBIT level, and saw its revenue drop to ₹1.3b, which is a fall of 57%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Oriental Hotels's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹546m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹125m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Oriental Hotels (including 2 which don't sit too well with us) .

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. 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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