Mazagon Dock Shipbuilders (NSE:MAZDOCK) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Mazagon Dock Shipbuilders Limited (NSE:MAZDOCK) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mazagon Dock Shipbuilders

What Is Mazagon Dock Shipbuilders's Debt?

As you can see below, at the end of September 2024, Mazagon Dock Shipbuilders had ₹361.7m of debt, up from ₹29.6m a year ago. Click the image for more detail. However, it does have ₹135.9b in cash offsetting this, leading to net cash of ₹135.6b.

How Strong Is Mazagon Dock Shipbuilders' Balance Sheet?

According to the last reported balance sheet, Mazagon Dock Shipbuilders had liabilities of ₹203.6b due within 12 months, and liabilities of ₹6.20b due beyond 12 months. On the other hand, it had cash of ₹135.9b and ₹28.7b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹45.1b.

Of course, Mazagon Dock Shipbuilders has a titanic market capitalization of ₹872.3b, 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. While it does have liabilities worth noting, Mazagon Dock Shipbuilders also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Mazagon Dock Shipbuilders grew its EBIT by 134% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Mazagon Dock Shipbuilders can strengthen its balance sheet over time. 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. Mazagon Dock Shipbuilders 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. Considering the last three years, Mazagon Dock Shipbuilders actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

We could understand if investors are concerned about Mazagon Dock Shipbuilders's liabilities, but we can be reassured by the fact it has has net cash of ₹135.6b. And it impressed us with its EBIT growth of 134% over the last year. So we don't have any problem with Mazagon Dock Shipbuilders's use of debt. 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 Mazagon Dock Shipbuilders has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.