Does MakeMyTrip (NASDAQ:MMYT) Have A Healthy Balance Sheet?

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.' 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 MakeMyTrip Limited (NASDAQ:MMYT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for MakeMyTrip

How Much Debt Does MakeMyTrip Carry?

As you can see below, at the end of September 2023, MakeMyTrip had US$227.3m of debt, up from US$211.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$524.1m in cash, so it actually has US$296.8m net cash.

A Look At MakeMyTrip's Liabilities

We can see from the most recent balance sheet that MakeMyTrip had liabilities of US$527.1m falling due within a year, and liabilities of US$30.1m due beyond that. Offsetting this, it had US$524.1m in cash and US$85.4m in receivables that were due within 12 months. So it actually has US$52.3m more liquid assets than total liabilities.

Having regard to MakeMyTrip's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.95b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that MakeMyTrip has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, MakeMyTrip grew its EBIT by 576% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MakeMyTrip's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. MakeMyTrip 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. Happily for any shareholders, MakeMyTrip actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MakeMyTrip has net cash of US$296.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in US$73m. So we don't think MakeMyTrip's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of MakeMyTrip's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.