Health Check: How Prudently Does INOX Leisure (NSE:INOXLEISUR) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that INOX Leisure Limited (NSE:INOXLEISUR) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for INOX Leisure

What Is INOX Leisure's Debt?

You can click the graphic below for the historical numbers, but it shows that INOX Leisure had ₹943.8m of debt in September 2021, down from ₹1.42b, one year before. But it also has ₹2.02b in cash to offset that, meaning it has ₹1.08b net cash.

How Strong Is INOX Leisure's Balance Sheet?

The latest balance sheet data shows that INOX Leisure had liabilities of ₹3.52b due within a year, and liabilities of ₹28.2b falling due after that. Offsetting these obligations, it had cash of ₹2.02b as well as receivables valued at ₹35.2m due within 12 months. So it has liabilities totalling ₹29.7b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since INOX Leisure has a market capitalization of ₹56.5b, 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. Despite its noteworthy liabilities, INOX Leisure boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if INOX Leisure can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year INOX Leisure had a loss before interest and tax, and actually shrunk its revenue by 80%, to ₹1.8b. That makes us nervous, to say the least.

So How Risky Is INOX Leisure?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months INOX Leisure lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₹2.0b and booked a ₹4.1b accounting loss. Given it only has net cash of ₹1.08b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with INOX Leisure , and understanding them should be part of your investment process.

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.

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.

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