Does MMTC (NSE:MMTC) Have A Healthy Balance Sheet?

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. As with many other companies MMTC Limited (NSE:MMTC) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MMTC

What Is MMTC's Debt?

The image below, which you can click on for greater detail, shows that MMTC had debt of ₹213.7m at the end of September 2023, a reduction from ₹1.42b over a year. However, it does have ₹13.1b in cash offsetting this, leading to net cash of ₹12.9b.

How Strong Is MMTC's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MMTC had liabilities of ₹19.2b due within 12 months and liabilities of ₹474.6m due beyond that. Offsetting this, it had ₹13.1b in cash and ₹1.40b in receivables that were due within 12 months. So its liabilities total ₹5.12b more than the combination of its cash and short-term receivables.

Since publicly traded MMTC shares are worth a total of ₹90.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, MMTC also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MMTC'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 MMTC had a loss before interest and tax, and actually shrunk its revenue by 78%, to ₹15b. To be frank that doesn't bode well.

So How Risky Is MMTC?

While MMTC lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₹1.7b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. We've identified 3 warning signs with MMTC (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.