TAJGVK Hotels & Resorts (NSE:TAJGVK) Seems To Use Debt Rather Sparingly

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.' 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 TAJGVK Hotels & Resorts Limited (NSE:TAJGVK) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TAJGVK Hotels & Resorts

What Is TAJGVK Hotels & Resorts's Net Debt?

You can click the graphic below for the historical numbers, but it shows that TAJGVK Hotels & Resorts had ₹466.1m of debt in September 2024, down from ₹833.0m, one year before. But on the other hand it also has ₹791.8m in cash, leading to a ₹325.7m net cash position.

How Healthy Is TAJGVK Hotels & Resorts' Balance Sheet?

According to the last reported balance sheet, TAJGVK Hotels & Resorts had liabilities of ₹1.41b due within 12 months, and liabilities of ₹1.25b due beyond 12 months. Offsetting this, it had ₹791.8m in cash and ₹211.8m in receivables that were due within 12 months. So it has liabilities totalling ₹1.65b more than its cash and near-term receivables, combined.

Of course, TAJGVK Hotels & Resorts has a market capitalization of ₹27.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, TAJGVK Hotels & Resorts boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, TAJGVK Hotels & Resorts grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TAJGVK Hotels & Resorts's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TAJGVK Hotels & Resorts 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, TAJGVK Hotels & Resorts produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that TAJGVK Hotels & Resorts has ₹325.7m in net cash. And we liked the look of last year's 35% year-on-year EBIT growth. So we don't think TAJGVK Hotels & Resorts's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - TAJGVK Hotels & Resorts has 2 warning signs we think you should be aware of.

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.