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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that India Tourism Development Corporation Limited (NSE:ITDC) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
What Is India Tourism Development's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 India Tourism Development had ₹11.5m of debt, an increase on ₹10.4m, over one year. However, its balance sheet shows it holds ₹3.64b in cash, so it actually has ₹3.63b net cash.
How Healthy Is India Tourism Development's Balance Sheet?
According to the last reported balance sheet, India Tourism Development had liabilities of ₹2.76b due within 12 months, and liabilities of ₹602.4m due beyond 12 months. Offsetting this, it had ₹3.64b in cash and ₹1.70b in receivables that were due within 12 months. So it can boast ₹1.97b more liquid assets than total liabilities.
This short term liquidity is a sign that India Tourism Development could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that India Tourism Development has more cash than debt is arguably a good indication that it can manage its debt safely.
Although India Tourism Development made a loss at the EBIT level, last year, it was also good to see that it generated ₹160m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is India Tourism Development'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 India Tourism Development 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. Over the last year, India Tourism Development saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that India Tourism Development has net cash of ₹3.6b, as well as more liquid assets than liabilities. So we don't have any problem with India Tourism Development's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in India Tourism Development, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.