Is MRF (NSE:MRF) A Risky Investment?

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

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for MRF

What Is MRF's Debt?

You can click the graphic below for the historical numbers, but it shows that MRF had ₹23.1b of debt in September 2024, down from ₹24.3b, one year before. However, its balance sheet shows it holds ₹31.1b in cash, so it actually has ₹8.01b net cash.

How Healthy Is MRF's Balance Sheet?

According to the last reported balance sheet, MRF had liabilities of ₹85.1b due within 12 months, and liabilities of ₹22.4b due beyond 12 months. Offsetting these obligations, it had cash of ₹31.1b as well as receivables valued at ₹32.2b due within 12 months. So its liabilities total ₹44.2b more than the combination of its cash and short-term receivables.

Of course, MRF has a market capitalization of ₹483.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, MRF boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, MRF grew its EBIT by 9.2% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MRF'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 company can only pay off debt with cold hard cash, not accounting profits. MRF 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. In the last three years, MRF created free cash flow amounting to 2.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MRF has ₹8.01b in net cash. On top of that, it increased its EBIT by 9.2% in the last twelve months. So we are not troubled with MRF's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in MRF, you may well want to click here to check an interactive graph of its earnings per share history.

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.