Does Mastek (NSE:MASTEK) Have A Healthy Balance Sheet?

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.' 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, Mastek Limited (NSE:MASTEK) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mastek

How Much Debt Does Mastek Carry?

You can click the graphic below for the historical numbers, but it shows that Mastek had ₹1.90b of debt in March 2022, down from ₹2.60b, one year before. However, it does have ₹7.82b in cash offsetting this, leading to net cash of ₹5.92b.

How Healthy Is Mastek's Balance Sheet?

The latest balance sheet data shows that Mastek had liabilities of ₹8.52b due within a year, and liabilities of ₹4.14b falling due after that. Offsetting these obligations, it had cash of ₹7.82b as well as receivables valued at ₹4.36b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹490.0m.

Having regard to Mastek's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹72.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Mastek also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Mastek grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mastek'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Mastek has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Mastek recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Mastek has ₹5.92b in net cash. And we liked the look of last year's 27% year-on-year EBIT growth. So is Mastek's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Mastek , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.