These 4 Measures Indicate That Sinclairs Hotels (NSE:SINCLAIR) Is Using Debt Reasonably Well

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.' 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. As with many other companies Sinclairs Hotels Limited (NSE:SINCLAIR) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Sinclairs Hotels Carry?

The image below, which you can click on for greater detail, shows that at March 2025 Sinclairs Hotels had debt of ₹206.2m, up from ₹101.9m in one year. However, its balance sheet shows it holds ₹704.7m in cash, so it actually has ₹498.5m net cash.

A Look At Sinclairs Hotels' Liabilities

The latest balance sheet data shows that Sinclairs Hotels had liabilities of ₹68.2m due within a year, and liabilities of ₹257.1m falling due after that. Offsetting these obligations, it had cash of ₹704.7m as well as receivables valued at ₹19.1m due within 12 months. So it actually has ₹398.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Sinclairs Hotels could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sinclairs Hotels boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Sinclairs Hotels

It is just as well that Sinclairs Hotels's load is not too heavy, because its EBIT was down 26% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sinclairs Hotels may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Sinclairs Hotels recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sinclairs Hotels has net cash of ₹498.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in ₹83m. So we don't have any problem with Sinclairs Hotels's use of debt. 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 3 warning signs for Sinclairs Hotels that you should be aware of before investing here.

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.