Is MSTC (NSE:MSTCLTD) A Risky Investment?

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 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 note that MSTC Limited (NSE:MSTCLTD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MSTC

How Much Debt Does MSTC Carry?

As you can see below, MSTC had ₹1.45b of debt at September 2022, down from ₹1.53b a year prior. However, its balance sheet shows it holds ₹10.8b in cash, so it actually has ₹9.38b net cash.

A Look At MSTC's Liabilities

According to the last reported balance sheet, MSTC had liabilities of ₹13.5b due within 12 months, and liabilities of ₹846.6m due beyond 12 months. Offsetting these obligations, it had cash of ₹10.8b as well as receivables valued at ₹4.76b due within 12 months. So it actually has ₹1.29b more liquid assets than total liabilities.

This surplus suggests that MSTC has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, MSTC boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, MSTC grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is MSTC's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. MSTC 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. Happily for any shareholders, MSTC actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case MSTC has ₹9.38b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₹2.2b, being 208% of its EBIT. So is MSTC's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with MSTC , and understanding them should be part of your investment process.

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.