Does MakeMyTrip (NASDAQ:MMYT) Have A Healthy 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, MakeMyTrip Limited (NASDAQ:MMYT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 MakeMyTrip

How Much Debt Does MakeMyTrip Carry?

As you can see below, at the end of September 2022, MakeMyTrip had US$211.0m of debt, up from US$195.2m a year ago. Click the image for more detail. But on the other hand it also has US$460.7m in cash, leading to a US$249.6m net cash position.

How Strong Is MakeMyTrip's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MakeMyTrip had liabilities of US$233.9m due within 12 months and liabilities of US$236.4m due beyond that. Offsetting this, it had US$460.7m in cash and US$63.9m in receivables that were due within 12 months. So it can boast US$54.3m more liquid assets than total liabilities.

This state of affairs indicates that MakeMyTrip's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$2.89b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, MakeMyTrip boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that MakeMyTrip improved its EBIT from a last year's loss to a positive US$5.6m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MakeMyTrip 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While MakeMyTrip 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 year, MakeMyTrip saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case MakeMyTrip has US$249.6m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about MakeMyTrip's balance sheet. While MakeMyTrip didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.