Is INOX Leisure (NSE:INOXLEISUR) A Risky Investment?

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, INOX Leisure Limited (NSE:INOXLEISUR) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 ₹670.2m of debt in March 2021, down from ₹1.58b, one year before. But it also has ₹777.8m in cash to offset that, meaning it has ₹107.6m net cash.

How Strong Is INOX Leisure's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that INOX Leisure had liabilities of ₹3.64b due within 12 months and liabilities of ₹27.9b due beyond that. Offsetting this, it had ₹777.8m in cash and ₹48.5m in receivables that were due within 12 months. So it has liabilities totalling ₹30.7b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₹35.7b. 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, INOX Leisure also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine INOX Leisure's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, INOX Leisure made a loss at the EBIT level, and saw its revenue drop to ₹1.1b, which is a fall of 94%. To be frank that doesn't bode well.

So How Risky Is INOX Leisure?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year INOX Leisure had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₹1.9b of cash and made a loss of ₹3.4b. Given it only has net cash of ₹107.6m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for INOX Leisure you should know about.

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 INOX Leisure, 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.