Mahindra Logistics (NSE:MAHLOG) Could Easily Take On More Debt

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.' 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. Importantly, Mahindra Logistics Limited (NSE:MAHLOG) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Mahindra Logistics

How Much Debt Does Mahindra Logistics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Mahindra Logistics had ₹395.5m of debt, an increase on ₹299.1m, over one year. But it also has ₹2.30b in cash to offset that, meaning it has ₹1.91b net cash.

How Healthy Is Mahindra Logistics' Balance Sheet?

The latest balance sheet data shows that Mahindra Logistics had liabilities of ₹10.3b due within a year, and liabilities of ₹2.24b falling due after that. Offsetting these obligations, it had cash of ₹2.30b as well as receivables valued at ₹4.98b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹5.29b.

Since publicly traded Mahindra Logistics shares are worth a total of ₹47.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Mahindra Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Mahindra Logistics grew its EBIT by 133% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mahindra Logistics can strengthen its balance sheet over time. 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. Mahindra Logistics 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, Mahindra Logistics 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

Although Mahindra Logistics's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₹1.91b. And it impressed us with free cash flow of ₹1.3b, being 163% of its EBIT. So we don't think Mahindra Logistics's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Mahindra Logistics is showing 2 warning signs in our investment analysis , you should know about...

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.