Asian Hotels (East) (NSE:AHLEAST) Takes On Some Risk With Its Use Of Debt
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.' 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, Asian Hotels (East) Limited (NSE:AHLEAST) does carry debt. But the real question is whether this debt is making the company risky.
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Asian Hotels (East) Carry?
The image below, which you can click on for greater detail, shows that at September 2025 Asian Hotels (East) had debt of ₹3.53b, up from ₹3.13b in one year. On the flip side, it has ₹85.4m in cash leading to net debt of about ₹3.45b.
How Strong Is Asian Hotels (East)'s Balance Sheet?
We can see from the most recent balance sheet that Asian Hotels (East) had liabilities of ₹3.19b falling due within a year, and liabilities of ₹1.53b due beyond that. Offsetting this, it had ₹85.4m in cash and ₹49.5m in receivables that were due within 12 months. So it has liabilities totalling ₹4.59b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₹2.48b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Asian Hotels (East) would probably need a major re-capitalization if its creditors were to demand repayment.
See our latest analysis for Asian Hotels (East)
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
As it happens Asian Hotels (East) has a fairly concerning net debt to EBITDA ratio of 9.2 but very strong interest coverage of 19.3. So either it has access to very cheap long term debt or that interest expense is going to grow! It is well worth noting that Asian Hotels (East)'s EBIT shot up like bamboo after rain, gaining 35% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Asian Hotels (East)'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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Asian Hotels (East) 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.
Our View
On the face of it, Asian Hotels (East)'s conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. We're quite clear that we consider Asian Hotels (East) to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Asian Hotels (East) has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.