We Think Mindteck (India) (NSE:MINDTECK) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mindteck (India)

How Much Debt Does Mindteck (India) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Mindteck (India) had ₹181.7m of debt, an increase on none, over one year. But it also has ₹796.0m in cash to offset that, meaning it has ₹614.3m net cash.

How Healthy Is Mindteck (India)'s Balance Sheet?

We can see from the most recent balance sheet that Mindteck (India) had liabilities of ₹594.1m falling due within a year, and liabilities of ₹95.8m due beyond that. Offsetting this, it had ₹796.0m in cash and ₹587.8m in receivables that were due within 12 months. So it can boast ₹693.9m more liquid assets than total liabilities.

This surplus strongly suggests that Mindteck (India) has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Mindteck (India) has more cash than debt is arguably a good indication that it can manage its debt safely.

It is well worth noting that Mindteck (India)'s EBIT shot up like bamboo after rain, gaining 77% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mindteck (India) 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.

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 two years, Mindteck (India) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Mindteck (India) has ₹614.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 975% of that EBIT to free cash flow, bringing in ₹211m. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Mindteck (India) (of which 1 is potentially serious!) 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. 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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