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

Warren Buffett famously said, '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 can see that Mahindra Lifespace Developers Limited (NSE:MAHLIFE) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Lifespace Developers

What Is Mahindra Lifespace Developers's Debt?

As you can see below, at the end of March 2024, Mahindra Lifespace Developers had ₹8.73b of debt, up from ₹2.65b a year ago. Click the image for more detail. However, it does have ₹1.93b in cash offsetting this, leading to net debt of about ₹6.80b.

A Look At Mahindra Lifespace Developers' Liabilities

According to the last reported balance sheet, Mahindra Lifespace Developers had liabilities of ₹24.3b due within 12 months, and liabilities of ₹6.59b due beyond 12 months. On the other hand, it had cash of ₹1.93b and ₹1.38b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹27.6b.

While this might seem like a lot, it is not so bad since Mahindra Lifespace Developers has a market capitalization of ₹93.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 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.

In the last year Mahindra Lifespace Developers had a loss before interest and tax, and actually shrunk its revenue by 65%, to ₹2.1b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Mahindra Lifespace Developers's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₹1.8b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹6.8b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Mahindra Lifespace Developers (of which 1 can't be ignored!) you should know about.

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.

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