Is Mahindra Lifespace Developers (NSE:MAHLIFE) 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.' 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 the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mahindra Lifespace Developers

What Is Mahindra Lifespace Developers's Debt?

As you can see below, at the end of March 2022, Mahindra Lifespace Developers had ₹2.86b of debt, up from ₹2.45b a year ago. Click the image for more detail. On the flip side, it has ₹2.13b in cash leading to net debt of about ₹734.9m.

How Healthy Is Mahindra Lifespace Developers' Balance Sheet?

The latest balance sheet data shows that Mahindra Lifespace Developers had liabilities of ₹11.3b due within a year, and liabilities of ₹692.4m falling due after that. Offsetting these obligations, it had cash of ₹2.13b as well as receivables valued at ₹2.13b due within 12 months. So it has liabilities totalling ₹7.74b more than its cash and near-term receivables, combined.

Given Mahindra Lifespace Developers has a market capitalization of ₹69.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Mahindra Lifespace Developers has a very light debt load indeed. 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.

In the last year Mahindra Lifespace Developers wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to ₹3.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Mahindra Lifespace Developers had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹902m at the EBIT level. 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 ₹653m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Mahindra Lifespace Developers you should be aware of, and 1 of them makes us a bit uncomfortable.

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.