Is TGB Banquets and Hotels (NSE:TGBHOTELS) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that TGB Banquets and Hotels Limited (NSE:TGBHOTELS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for TGB Banquets and Hotels

What Is TGB Banquets and Hotels's Net Debt?

As you can see below, TGB Banquets and Hotels had ₹118.8m of debt at March 2021, down from ₹134.0m a year prior. However, because it has a cash reserve of ₹6.10m, its net debt is less, at about ₹112.7m.

How Healthy Is TGB Banquets and Hotels' Balance Sheet?

The latest balance sheet data shows that TGB Banquets and Hotels had liabilities of ₹592.7m due within a year, and liabilities of ₹79.8m falling due after that. Offsetting these obligations, it had cash of ₹6.10m as well as receivables valued at ₹507.0m due within 12 months. So it has liabilities totalling ₹159.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since TGB Banquets and Hotels has a market capitalization of ₹267.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TGB Banquets and 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 TGB Banquets and Hotels had a loss before interest and tax, and actually shrunk its revenue by 56%, to ₹148m. That makes us nervous, to say the least.

Caveat Emptor

Not only did TGB Banquets and Hotels's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹35m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹3.1m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for TGB Banquets and Hotels you should be aware of, and 1 of them makes us a bit uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade TGB Banquets and Hotels, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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