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.' 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. Importantly, MakeMyTrip Limited (NASDAQ:MMYT) does carry debt. But the real question is whether this debt is making the company risky.
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. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does MakeMyTrip Carry?
You can click the graphic below for the historical numbers, but it shows that MakeMyTrip had US$209.2m of debt in June 2024, down from US$222.9m, one year before. However, its balance sheet shows it holds US$674.6m in cash, so it actually has US$465.4m net cash.
A Look At MakeMyTrip's Liabilities
According to the last reported balance sheet, MakeMyTrip had liabilities of US$338.3m due within 12 months, and liabilities of US$248.6m due beyond 12 months. Offsetting this, it had US$674.6m in cash and US$114.6m in receivables that were due within 12 months. So it actually has US$202.4m 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$12.1b 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 106% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MakeMyTrip's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. MakeMyTrip may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, MakeMyTrip actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case MakeMyTrip has US$465.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$148m, being 188% 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with MakeMyTrip , and understanding them should be part of your investment process.
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.