Minda (NSE:MINDACORP) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Minda Corporation Limited (NSE:MINDACORP) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Minda

What Is Minda's Net Debt?

As you can see below, Minda had ₹4.83b of debt at March 2021, down from ₹5.32b a year prior. However, it does have ₹4.85b in cash offsetting this, leading to net cash of ₹16.0m.

How Healthy Is Minda's Balance Sheet?

We can see from the most recent balance sheet that Minda had liabilities of ₹9.97b falling due within a year, and liabilities of ₹1.87b due beyond that. Offsetting these obligations, it had cash of ₹4.85b as well as receivables valued at ₹4.78b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹2.20b.

Given Minda has a market capitalization of ₹34.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

In fact Minda's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Minda 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the most recent three years, Minda recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Minda's liabilities, but we can be reassured by the fact it has has net cash of ₹16.0m. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in -₹495m. So we don't have any problem with Minda's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Minda has 5 warning signs (and 1 which can't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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