Does Minda (NSE:MINDACORP) Have A Healthy Balance Sheet?

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. We can see that Minda Corporation Limited (NSE:MINDACORP) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Minda

What Is Minda's Debt?

The image below, which you can click on for greater detail, shows that Minda had debt of ₹3.48b at the end of March 2024, a reduction from ₹5.53b over a year. However, its balance sheet shows it holds ₹4.83b in cash, so it actually has ₹1.35b net cash.

How Strong Is Minda's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Minda had liabilities of ₹11.0b due within 12 months and liabilities of ₹3.56b due beyond that. On the other hand, it had cash of ₹4.83b and ₹8.08b worth of receivables due within a year. So it has liabilities totalling ₹1.67b more than its cash and near-term receivables, combined.

This state of affairs indicates that Minda'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 ₹111.4b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Minda also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Minda grew its EBIT by 5.8% in the last year, making that debt load look even more manageable. 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 Minda'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. While Minda 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. Looking at the most recent three years, Minda recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Minda has ₹1.35b in net cash. On top of that, it increased its EBIT by 5.8% in the last twelve months. So we are not troubled with Minda's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Minda that you should be aware of.

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.

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