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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Mindteck (India) Limited (NSE:MINDTECK) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mindteck (India)

What Is Mindteck (India)'s Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Mindteck (India) had debt of ₹181.7m, up from ₹148.0m in one year. However, its balance sheet shows it holds ₹796.0m in cash, so it actually has ₹614.3m net cash.

A Look At Mindteck (India)'s Liabilities

The latest balance sheet data shows that Mindteck (India) had liabilities of ₹594.1m due within a year, and liabilities of ₹95.8m falling due after that. On the other hand, it had cash of ₹796.0m and ₹587.8m worth of receivables due within a year. So it actually has ₹693.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Mindteck (India)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Mindteck (India) has more cash than debt is arguably a good indication that it can manage its debt safely.

Pleasingly, Mindteck (India) is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 524% gain in the last twelve months. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mindteck (India) 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 last two years, 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 ₹614.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 426% of that EBIT to free cash flow, bringing in ₹211m. When it comes to Mindteck (India)'s debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Mindteck (India) (1 can't be ignored) you should be aware of.

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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