We Think Mahindra EPC Irrigation (NSE:MAHEPC) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Mahindra EPC Irrigation Limited (NSE:MAHEPC) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mahindra EPC Irrigation

What Is Mahindra EPC Irrigation's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Mahindra EPC Irrigation had ₹251.9m of debt, an increase on none, over one year. However, it does have ₹21.4m in cash offsetting this, leading to net debt of about ₹230.6m.

A Look At Mahindra EPC Irrigation's Liabilities

Zooming in on the latest balance sheet data, we can see that Mahindra EPC Irrigation had liabilities of ₹1.04b due within 12 months and liabilities of ₹7.18m due beyond that. On the other hand, it had cash of ₹21.4m and ₹1.38b worth of receivables due within a year. So it can boast ₹358.0m more liquid assets than total liabilities.

This surplus suggests that Mahindra EPC Irrigation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. There's no doubt that we learn most about debt from the balance sheet. But it is Mahindra EPC Irrigation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Mahindra EPC Irrigation had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₹2.1b. We would much prefer see growth.

Caveat Emptor

Not only did Mahindra EPC Irrigation's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹81m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Mahindra EPC Irrigation (1 is significant!) that you should be aware of before investing here.

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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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.