Does Sinclairs Hotels (NSE:SINCLAIR) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Sinclairs Hotels Limited (NSE:SINCLAIR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sinclairs Hotels

What Is Sinclairs Hotels's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Sinclairs Hotels had ₹223.6m of debt, an increase on ₹104.7m, over one year. But on the other hand it also has ₹693.6m in cash, leading to a ₹470.0m net cash position.

How Healthy Is Sinclairs Hotels' Balance Sheet?

According to the last reported balance sheet, Sinclairs Hotels had liabilities of ₹83.6m due within 12 months, and liabilities of ₹273.9m due beyond 12 months. On the other hand, it had cash of ₹693.6m and ₹11.8m worth of receivables due within a year. So it actually has ₹347.8m more liquid assets than total liabilities.

This surplus suggests that Sinclairs Hotels has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sinclairs Hotels boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Sinclairs Hotels has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sinclairs 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sinclairs Hotels has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Sinclairs Hotels generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sinclairs Hotels has ₹470.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹125m, being 85% of its EBIT. So we don't think Sinclairs Hotels's use of debt is risky. 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. We've identified 5 warning signs with Sinclairs Hotels (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.