Would TGB Banquets and Hotels (NSE:TGBHOTELS) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, TGB Banquets and Hotels Limited (NSE:TGBHOTELS) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TGB Banquets and Hotels

How Much Debt Does TGB Banquets and Hotels Carry?

The image below, which you can click on for greater detail, shows that TGB Banquets and Hotels had debt of ₹159.6m at the end of March 2023, a reduction from ₹203.7m over a year. On the flip side, it has ₹5.07m in cash leading to net debt of about ₹154.5m.

How Healthy Is TGB Banquets and Hotels' Balance Sheet?

The latest balance sheet data shows that TGB Banquets and Hotels had liabilities of ₹430.2m due within a year, and liabilities of ₹49.5m falling due after that. Offsetting these obligations, it had cash of ₹5.07m as well as receivables valued at ₹506.6m due within 12 months. So it can boast ₹32.0m more liquid assets than total liabilities.

This surplus suggests that TGB Banquets and Hotels has a conservative balance sheet, and could probably eliminate its debt without much difficulty. There's no doubt that we learn most about debt from the balance sheet. But it is TGB Banquets and Hotels'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.

Over 12 months, TGB Banquets and Hotels made a loss at the EBIT level, and saw its revenue drop to ₹334m, which is a fall of 5.5%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months TGB Banquets and Hotels produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹12m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of ₹46m and profit of ₹14m over the last year. This one is a bit too risky for our liking. 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. Be aware that TGB Banquets and Hotels is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.