Is MMTC (NSE:MMTC) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 MMTC Limited (NSE:MMTC) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MMTC

What Is MMTC's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 MMTC had debt of ₹25.4b, up from ₹18.8b in one year. On the flip side, it has ₹15.7b in cash leading to net debt of about ₹9.65b.

How Healthy Is MMTC's Balance Sheet?

According to the last reported balance sheet, MMTC had liabilities of ₹73.2b due within 12 months, and liabilities of ₹2.30b due beyond 12 months. Offsetting this, it had ₹15.7b in cash and ₹15.7b in receivables that were due within 12 months. So its liabilities total ₹44.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₹27.0b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, MMTC would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MMTC will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, MMTC made a loss at the EBIT level, and saw its revenue drop to ₹215b, which is a fall of 30%. To be frank that doesn't bode well.

Caveat Emptor

Not only did MMTC's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹1.9b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₹3.9b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with MMTC (including 1 which is is significant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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