Is MT Educare (NSE:MTEDUCARE) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that MT Educare Limited (NSE:MTEDUCARE) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MT Educare

How Much Debt Does MT Educare Carry?

As you can see below, MT Educare had ₹415.3m of debt at September 2020, down from ₹850.7m a year prior. However, it does have ₹694.3m in cash offsetting this, leading to net cash of ₹279.0m.

How Healthy Is MT Educare's Balance Sheet?

The latest balance sheet data shows that MT Educare had liabilities of ₹1.73b due within a year, and liabilities of ₹853.5m falling due after that. Offsetting this, it had ₹694.3m in cash and ₹642.8m in receivables that were due within 12 months. So it has liabilities totalling ₹1.25b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹720.1m 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 definitely think shareholders need to watch this one closely. At the end of the day, MT Educare would probably need a major re-capitalization if its creditors were to demand repayment. Given that MT Educare has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since MT Educare 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, MT Educare made a loss at the EBIT level, and saw its revenue drop to ₹1.4b, which is a fall of 40%. To be frank that doesn't bode well.

So How Risky Is MT Educare?

Although MT Educare had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹500m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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 3 warning signs for MT Educare (2 are a bit unpleasant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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