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.' 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. We can see that MakeMyTrip Limited (NASDAQ:MMYT) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is MakeMyTrip's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2022 MakeMyTrip had debt of US$206.9m, up from US$191.8m in one year. But it also has US$462.5m in cash to offset that, meaning it has US$255.6m net cash.
A Look At MakeMyTrip's Liabilities
Zooming in on the latest balance sheet data, we can see that MakeMyTrip had liabilities of US$204.6m due within 12 months and liabilities of US$235.7m due beyond that. Offsetting this, it had US$462.5m in cash and US$51.2m in receivables that were due within 12 months. So it can boast US$73.5m more liquid assets than total liabilities.
This surplus suggests that MakeMyTrip has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MakeMyTrip has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, MakeMyTrip reported revenue of US$414m, which is a gain of 118%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth
So How Risky Is MakeMyTrip?
While MakeMyTrip lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$17m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 118% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. For riskier companies like MakeMyTrip I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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