Mastek (NSE:MASTEK) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mastek Limited (NSE:MASTEK) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Mastek

What Is Mastek's Net Debt?

The image below, which you can click on for greater detail, shows that Mastek had debt of ₹1.55b at the end of September 2021, a reduction from ₹2.52b over a year. However, its balance sheet shows it holds ₹9.00b in cash, so it actually has ₹7.45b net cash.

How Healthy Is Mastek's Balance Sheet?

According to the last reported balance sheet, Mastek had liabilities of ₹8.39b due within 12 months, and liabilities of ₹5.90b due beyond 12 months. On the other hand, it had cash of ₹9.00b and ₹3.88b worth of receivables due within a year. So it has liabilities totalling ₹1.42b more than its cash and near-term receivables, combined.

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 ₹96.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Mastek boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Mastek grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. Mastek may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Mastek recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

We could understand if investors are concerned about Mastek's liabilities, but we can be reassured by the fact it has has net cash of ₹7.45b. And it impressed us with free cash flow of ₹2.6b, being 82% of its EBIT. So is Mastek's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 3 warning signs for Mastek that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.