Mindteck (India) (NSE:MINDTECK) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Mindteck (India) Limited (NSE:MINDTECK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mindteck (India)

How Much Debt Does Mindteck (India) Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Mindteck (India) had debt of ₹180.8m, up from ₹127.6m in one year. But on the other hand it also has ₹506.0m in cash, leading to a ₹325.2m net cash position.

A Look At Mindteck (India)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Mindteck (India) had liabilities of ₹585.8m due within 12 months and liabilities of ₹82.0m due beyond that. On the other hand, it had cash of ₹506.0m and ₹711.4m worth of receivables due within a year. So it actually has ₹549.6m more liquid assets than total liabilities.

It's good to see that Mindteck (India) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Mindteck (India) has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Mindteck (India) made a loss at the EBIT level, last year, it was also good to see that it generated ₹147m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mindteck (India)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Mindteck (India) 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 year, Mindteck (India) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Mindteck (India) has net cash of ₹325.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 225% of that EBIT to free cash flow, bringing in ₹331m. So is Mindteck (India)'s debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Mindteck (India) has 4 warning signs (and 1 which is significant) we think 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.
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