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. We note that MakeMyTrip Limited (NASDAQ:MMYT) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is MakeMyTrip's Debt?
As you can see below, MakeMyTrip had US$217.4m of debt at December 2024, down from US$231.5m a year prior. But it also has US$703.8m in cash to offset that, meaning it has US$486.4m net cash.
How Healthy Is MakeMyTrip's Balance Sheet?
We can see from the most recent balance sheet that MakeMyTrip had liabilities of US$364.4m falling due within a year, and liabilities of US$255.9m due beyond that. Offsetting this, it had US$703.8m in cash and US$152.8m in receivables that were due within 12 months. So it actually has US$236.4m 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. Succinctly put, MakeMyTrip boasts net cash, so it's fair to say it does not have a heavy debt load!
Check out our latest analysis for MakeMyTrip
On top of that, MakeMyTrip grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 three 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$486.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in US$83m. 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. We've identified 1 warning sign with MakeMyTrip , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.