Mahindra Lifespace Developers (NSE:MAHLIFE) Is Making Moderate Use Of 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 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. Importantly, Mahindra Lifespace Developers Limited (NSE:MAHLIFE) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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

How Much Debt Does Mahindra Lifespace Developers Carry?

You can click the graphic below for the historical numbers, but it shows that Mahindra Lifespace Developers had ₹2.68b of debt in March 2023, down from ₹2.86b, one year before. However, because it has a cash reserve of ₹2.49b, its net debt is less, at about ₹186.7m.

How Healthy Is Mahindra Lifespace Developers' Balance Sheet?

According to the last reported balance sheet, Mahindra Lifespace Developers had liabilities of ₹17.9b due within 12 months, and liabilities of ₹141.4m due beyond 12 months. Offsetting this, it had ₹2.49b in cash and ₹1.56b in receivables that were due within 12 months. So it has liabilities totalling ₹14.0b more than its cash and near-term receivables, combined.

Of course, Mahindra Lifespace Developers has a market capitalization of ₹79.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 ₹6.1b, which is a gain of 79%, 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

Even though Mahindra Lifespace Developers managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₹1.2b. 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 ₹1.6b of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Mahindra Lifespace Developers that 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.

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