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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 September 2024, Mahindra Lifespace Developers had ₹9.28b of debt, up from ₹2.91b a year ago. Click the image for more detail. However, it does have ₹3.36b in cash offsetting this, leading to net debt of about ₹5.92b.

A Look At Mahindra Lifespace Developers' Liabilities

The latest balance sheet data shows that Mahindra Lifespace Developers had liabilities of ₹30.3b due within a year, and liabilities of ₹6.62b falling due after that. Offsetting these obligations, it had cash of ₹3.36b as well as receivables valued at ₹1.99b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹31.6b.

This deficit isn't so bad because Mahindra Lifespace Developers is worth ₹66.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 it is future earnings, more than anything, that will determine Mahindra Lifespace Developers's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Mahindra Lifespace Developers made a loss at the EBIT level, and saw its revenue drop to ₹2.9b, which is a fall of 48%. To be frank that doesn't bode well.

Caveat Emptor

While Mahindra Lifespace Developers's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹2.0b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₹5.1b of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Mahindra Lifespace Developers is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.