We Think Mahindra Lifespace Developers (NSE:MAHLIFE) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Mahindra Lifespace Developers Limited (NSE:MAHLIFE) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, 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.

Check out 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 2022, Mahindra Lifespace Developers had ₹2.80b of debt, up from ₹2.44b a year ago. Click the image for more detail. However, because it has a cash reserve of ₹2.26b, its net debt is less, at about ₹549.8m.

How Strong Is Mahindra Lifespace Developers' Balance Sheet?

We can see from the most recent balance sheet that Mahindra Lifespace Developers had liabilities of ₹11.3b falling due within a year, and liabilities of ₹692.4m due beyond that. Offsetting these obligations, it had cash of ₹2.26b as well as receivables valued at ₹2.20b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹7.54b.

Since publicly traded Mahindra Lifespace Developers shares are worth a total of ₹55.3b, it seems unlikely that this level of liabilities would be a major 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 137%, to ₹3.9b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

While we can certainly appreciate Mahindra Lifespace Developers's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₹960m 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. 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 ₹653m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 4 warning signs for Mahindra Lifespace Developers (of which 1 is a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.