Is MMTC (NSE:MMTC) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 MMTC Limited (NSE:MMTC) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 ₹1.96b at the end of March 2023, a reduction from ₹26.2b over a year. But it also has ₹13.5b in cash to offset that, meaning it has ₹11.5b net cash.

How Healthy Is MMTC's Balance Sheet?

The latest balance sheet data shows that MMTC had liabilities of ₹22.2b due within a year, and liabilities of ₹488.7m falling due after that. Offsetting this, it had ₹13.5b in cash and ₹4.05b in receivables that were due within 12 months. So its liabilities total ₹5.15b more than the combination of its cash and short-term receivables.

Of course, MMTC has a market capitalization of ₹57.1b, so these liabilities are probably manageable. 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, MMTC also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, MMTC made a loss at the EBIT level, and saw its revenue drop to ₹35b, which is a fall of 70%. 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 ₹16b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - MMTC has 1 warning sign we think you should be aware of.

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.