These 4 Measures Indicate That Mahindra Holidays & Resorts India (NSE:MHRIL) Is Using Debt Extensively

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Mahindra Holidays & Resorts India Limited (NSE:MHRIL) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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?

As you can see below, Mahindra Holidays & Resorts India had ₹25.7b of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₹7.15b in cash leading to net debt of about ₹18.5b.

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

Zooming in on the latest balance sheet data, we can see that Mahindra Holidays & Resorts India had liabilities of ₹16.6b due within 12 months and liabilities of ₹69.3b due beyond that. Offsetting these obligations, it had cash of ₹7.15b as well as receivables valued at ₹10.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹68.7b.

Given this deficit is actually higher than the company's market capitalization of ₹56.9b, we think shareholders really should watch Mahindra Holidays & Resorts India's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 7.0, it's fair to say Mahindra Holidays & Resorts India does have a significant amount of debt. However, its interest coverage of 4.2 is reasonably strong, which is a good sign. One redeeming factor for Mahindra Holidays & Resorts India is that it turned last year's EBIT loss into a gain of ₹1.6b, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Mahindra Holidays & Resorts India actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

We'd go so far as to say Mahindra Holidays & Resorts India's net debt to EBITDA was disappointing. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that Mahindra Holidays & Resorts India's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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 Mahindra Holidays & Resorts India has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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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.