We Think Thomas Cook (India) (NSE:THOMASCOOK) Can Manage Its Debt With Ease

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.' 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 Thomas Cook (India) Limited (NSE:THOMASCOOK) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Thomas Cook (India)

What Is Thomas Cook (India)'s Debt?

As you can see below, Thomas Cook (India) had ₹4.62b of debt at September 2023, down from ₹6.70b a year prior. But on the other hand it also has ₹11.5b in cash, leading to a ₹6.90b net cash position.

How Strong 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 ₹34.3b due within 12 months and liabilities of ₹10.2b due beyond that. Offsetting this, it had ₹11.5b in cash and ₹8.31b in receivables that were due within 12 months. So it has liabilities totalling ₹24.6b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Thomas Cook (India) is worth ₹74.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Better yet, Thomas Cook (India) grew its EBIT by 323% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Thomas Cook (India)'s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Thomas Cook (India) 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. Happily for any shareholders, Thomas Cook (India) actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 ₹6.90b. And it impressed us with free cash flow of ₹8.6b, being 361% of its EBIT. So is Thomas Cook (India)'s debt a risk? It doesn't seem so to us. 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, we've discovered 1 warning sign for Thomas Cook (India) that you should be aware of before investing here.

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.

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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.