Is Mahindra Holidays & Resorts India (NSE:MHRIL) A Risky Investment?

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 note that Mahindra Holidays & Resorts India Limited (NSE:MHRIL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Mahindra Holidays & Resorts India

How Much Debt Does Mahindra Holidays & Resorts India Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Mahindra Holidays & Resorts India had ₹7.57b of debt, an increase on ₹6.59b, over one year. But on the other hand it also has ₹8.66b in cash, leading to a ₹1.09b net cash position.

How Healthy Is Mahindra Holidays & Resorts India's Balance Sheet?

According to the last reported balance sheet, Mahindra Holidays & Resorts India had liabilities of ₹19.7b due within 12 months, and liabilities of ₹70.4b due beyond 12 months. Offsetting these obligations, it had cash of ₹8.66b as well as receivables valued at ₹10.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹71.1b.

This is a mountain of leverage relative to its market capitalization of ₹82.2b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Mahindra Holidays & Resorts India boasts net cash, so it's fair to say it does not have a heavy debt load!

If Mahindra Holidays & Resorts India can keep growing EBIT at last year's rate of 10% over the last year, then it will find its debt load easier to manage. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mahindra Holidays & Resorts India 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Mahindra Holidays & Resorts India 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, Mahindra Holidays & Resorts India actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Mahindra Holidays & Resorts India's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.09b. The cherry on top was that in converted 286% of that EBIT to free cash flow, bringing in ₹2.5b. So we are not troubled with Mahindra Holidays & Resorts India's debt use. 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 instance, we've identified 2 warning signs for Mahindra Holidays & Resorts India that you should be aware of.

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.