Mahindra Lifespace Developers (NSE:MAHLIFE) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mahindra Lifespace Developers

How Much Debt Does Mahindra Lifespace Developers Carry?

As you can see below, at the end of March 2021, Mahindra Lifespace Developers had ₹2.43b of debt, up from ₹2.32b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹2.05b, its net debt is less, at about ₹382.0m.

How Healthy Is Mahindra Lifespace Developers' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mahindra Lifespace Developers had liabilities of ₹8.17b due within 12 months and liabilities of ₹822.4m due beyond that. Offsetting these obligations, it had cash of ₹2.05b as well as receivables valued at ₹1.41b due within 12 months. So its liabilities total ₹5.53b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Mahindra Lifespace Developers has a market capitalization of ₹25.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mahindra Lifespace Developers will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Mahindra Lifespace Developers made a loss at the EBIT level, and saw its revenue drop to ₹1.9b, which is a fall of 69%. 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 ₹789m. 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. However, it doesn't help that it burned through ₹717m 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Mahindra Lifespace Developers you should know about.

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.

If you decide to trade Mahindra Lifespace Developers, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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