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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MakeMyTrip Limited (NASDAQ:MMYT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for MakeMyTrip

How Much Debt Does MakeMyTrip Carry?

As you can see below, MakeMyTrip had US$209.2m of debt at June 2024, down from US$222.9m a year prior. However, its balance sheet shows it holds US$674.6m in cash, so it actually has US$465.4m net cash.

A Look At MakeMyTrip's Liabilities

The latest balance sheet data shows that MakeMyTrip had liabilities of US$338.3m due within a year, and liabilities of US$248.6m falling due after that. Offsetting this, it had US$674.6m in cash and US$114.6m in receivables that were due within 12 months. So it actually has US$202.4m 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 while it's hard to imagine that the US$11.3b 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!

Even more impressive was the fact that MakeMyTrip grew its EBIT by 106% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last two years, MakeMyTrip 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 MakeMyTrip has net cash of US$465.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$148m, being 188% of its EBIT. So we don't think MakeMyTrip's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for MakeMyTrip that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.