Is Thomas Cook (India) (NSE:THOMASCOOK) Using Too Much Debt?

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. As with many other companies Thomas Cook (India) Limited (NSE:THOMASCOOK) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Thomas Cook (India)

What Is Thomas Cook (India)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Thomas Cook (India) had ₹3.91b of debt in March 2023, down from ₹4.56b, one year before. But on the other hand it also has ₹8.10b in cash, leading to a ₹4.19b net cash position.

How Healthy Is Thomas Cook (India)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Thomas Cook (India) had liabilities of ₹29.9b due within 12 months and liabilities of ₹10.1b due beyond that. Offsetting these obligations, it had cash of ₹8.10b as well as receivables valued at ₹5.68b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹26.3b.

This is a mountain of leverage relative to its market capitalization of ₹30.1b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Thomas Cook (India) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Thomas Cook (India) made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹1.5b in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Thomas Cook (India)'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Thomas Cook (India) 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. Happily for any shareholders, Thomas Cook (India) actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Thomas Cook (India)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹4.19b. And it impressed us with free cash flow of ₹4.1b, being 266% of its EBIT. So we are not troubled with Thomas Cook (India)'s debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Thomas Cook (India) is showing 4 warning signs in our investment analysis , and 1 of those can't be ignored...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.