David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Mostly, Chalet Hotels Limited (NSE: CHALET) is in debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Chalet Hotels
What is Chalet Hotels debt?
The image below, which you can click on for more details, shows that as of September 2021, Chalet Hotels had a debt of ₹23.3 billion, up from ₹19.6 billion in one year. On the other hand, it has ₹490.5 million in cash, resulting in a net debt of around ₹22.8 billion.
How healthy is Chalet Hotels’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Chalet Hotels had liabilities of ₹7.69 billion due within 12 months and liabilities of ₹20.5 billion due beyond. In return, he had ₹490.5 million in cash and ₹500.3 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of ₹27.2 billion.
While that might sound like a lot, it’s not that bad since Chalet Hotels has a market capitalization of ₹58.0 billion, and so it could probably bolster its balance sheet by raising capital if needed. But we definitely want to keep our eyes peeled for indications that its debt is too risky. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Chalet Hotels can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Chalet Hotels was not profitable on an EBIT level, but managed to increase its revenue by 5.5% to ₹4.7 billion. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
Caveat Emptor
It is important to note that Chalet Hotels has recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, it lost ₹456 million in EBIT. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. So we think its balance sheet is a little stretched, but not beyond repair. For example, we would not like to see a repeat of last year’s ₹881m loss. We therefore believe that this title is quite risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example – Chalet Hotels has 1 warning sign we think you should know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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