Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that MakeMyTrip Limited (NASDAQ:MMYT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is MakeMyTrip's Debt?
The image below, which you can click on for greater detail, shows that at December 2023 MakeMyTrip had debt of US$231.5m, up from US$215.3m in one year. But on the other hand it also has US$606.6m in cash, leading to a US$375.1m net cash position.
A Look At MakeMyTrip's Liabilities
Zooming in on the latest balance sheet data, we can see that MakeMyTrip had liabilities of US$547.1m due within 12 months and liabilities of US$37.2m due beyond that. On the other hand, it had cash of US$606.6m and US$92.7m worth of receivables due within a year. So it can boast US$115.0m more liquid assets than total liabilities.
This state of affairs indicates that MakeMyTrip's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$7.64b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, MakeMyTrip boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, MakeMyTrip grew its EBIT by 334% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MakeMyTrip can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MakeMyTrip 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 two years, MakeMyTrip actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
While it is always sensible to investigate a company's debt, in this case MakeMyTrip has US$375.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$154m, being 183% of its EBIT. So we don't think MakeMyTrip's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with MakeMyTrip .
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.
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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.