Is Apeejay Surrendra Park Hotels (NSE:PARKHOTELS) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Apeejay Surrendra Park Hotels Limited (NSE:PARKHOTELS) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Apeejay Surrendra Park Hotels

What Is Apeejay Surrendra Park Hotels's Debt?

As you can see below, Apeejay Surrendra Park Hotels had ₹615.9m of debt at September 2024, down from ₹5.97b a year prior. However, it also had ₹493.7m in cash, and so its net debt is ₹122.2m.

How Strong Is Apeejay Surrendra Park Hotels' Balance Sheet?

According to the last reported balance sheet, Apeejay Surrendra Park Hotels had liabilities of ₹1.53b due within 12 months, and liabilities of ₹1.79b due beyond 12 months. On the other hand, it had cash of ₹493.7m and ₹305.3m worth of receivables due within a year. So it has liabilities totalling ₹2.52b more than its cash and near-term receivables, combined.

Of course, Apeejay Surrendra Park Hotels has a market capitalization of ₹36.6b, 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. Carrying virtually no net debt, Apeejay Surrendra Park Hotels has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt at just 0.07 times EBITDA, it seems Apeejay Surrendra Park Hotels only uses a little bit of leverage. But EBIT was only 3.6 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. Apeejay Surrendra Park Hotels grew its EBIT by 4.0% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Apeejay Surrendra Park 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Apeejay Surrendra Park Hotels produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Apeejay Surrendra Park Hotels's net debt to EBITDA suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its interest cover. Looking at all the aforementioned factors together, it strikes us that Apeejay Surrendra Park Hotels can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. Over time, share prices tend to follow earnings per share, so if you're interested in Apeejay Surrendra Park Hotels, you may well want to click here to check an interactive graph of its earnings per share history.

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.