Does Royal Orchid Hotels (NSE:ROHLTD) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Royal Orchid Hotels Limited (NSE:ROHLTD) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Royal Orchid Hotels

What Is Royal Orchid Hotels's Debt?

As you can see below, at the end of September 2021, Royal Orchid Hotels had ₹1.09b of debt, up from ₹897.2m a year ago. Click the image for more detail. On the flip side, it has ₹443.5m in cash leading to net debt of about ₹644.4m.

How Healthy Is Royal Orchid Hotels' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Royal Orchid Hotels had liabilities of ₹1.11b due within 12 months and liabilities of ₹1.42b due beyond that. Offsetting this, it had ₹443.5m in cash and ₹144.3m in receivables that were due within 12 months. So its liabilities total ₹1.94b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹2.38b, so it does suggest shareholders should keep an eye on Royal Orchid Hotels' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Royal Orchid Hotels will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Royal Orchid Hotels had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₹1.1b. That's not what we would hope to see.

Caveat Emptor

Not only did Royal Orchid Hotels's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹136m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹190m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Royal Orchid Hotels (1 is potentially serious!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.