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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Country Club Hospitality & Holidays Limited (NSE:CCHHL) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
View our latest analysis for Country Club Hospitality & Holidays
How Much Debt Does Country Club Hospitality & Holidays Carry?
As you can see below, Country Club Hospitality & Holidays had ₹3.50b of debt at March 2019, down from ₹4.45b a year prior. Net debt is about the same, since the it doesn't have much cash.
A Look At Country Club Hospitality & Holidays's Liabilities
We can see from the most recent balance sheet that Country Club Hospitality & Holidays had liabilities of ₹1.89b falling due within a year, and liabilities of ₹4.63b due beyond that. On the other hand, it had cash of ₹59.5m and ₹941.8m worth of receivables due within a year. So it has liabilities totalling ₹5.52b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the ₹670.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Country Club Hospitality & Holidays would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Country Club Hospitality & Holidays will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.