Here's Why Mahindra Lifespace Developers (NSE:MAHLIFE) Can Afford Some Debt

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 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 Lifespace Developers Limited (NSE:MAHLIFE) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mahindra Lifespace Developers

What Is Mahindra Lifespace Developers's Debt?

You can click the graphic below for the historical numbers, but it shows that Mahindra Lifespace Developers had ₹2.91b of debt in September 2023, down from ₹3.31b, one year before. However, it does have ₹2.65b in cash offsetting this, leading to net debt of about ₹256.4m.

How Strong Is Mahindra Lifespace Developers' Balance Sheet?

According to the last reported balance sheet, Mahindra Lifespace Developers had liabilities of ₹20.1b due within 12 months, and liabilities of ₹107.3m due beyond 12 months. Offsetting this, it had ₹2.65b in cash and ₹1.42b in receivables that were due within 12 months. So it has liabilities totalling ₹16.1b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Mahindra Lifespace Developers is worth ₹74.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Carrying virtually no net debt, Mahindra Lifespace Developers has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Mahindra Lifespace Developers 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.

Over 12 months, Mahindra Lifespace Developers reported revenue of ₹5.5b, which is a gain of 57%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Mahindra Lifespace Developers still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹1.2b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹736m in negative free cash flow over the last twelve months. So suffice it to say we do 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. For example - Mahindra Lifespace Developers has 3 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.