Health Check: How Prudently Does MakeMyTrip (NASDAQ:MMYT) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, MakeMyTrip Limited (NASDAQ:MMYT) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MakeMyTrip

What Is MakeMyTrip's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 MakeMyTrip had US$206.9m of debt, an increase on US$191.8m, over one year. But on the other hand it also has US$462.5m in cash, leading to a US$255.6m net cash position.

How Strong Is MakeMyTrip's Balance Sheet?

The latest balance sheet data shows that MakeMyTrip had liabilities of US$204.6m due within a year, and liabilities of US$235.7m falling due after that. Offsetting this, it had US$462.5m in cash and US$51.2m in receivables that were due within 12 months. So it can boast US$73.5m more liquid assets than total liabilities.

This surplus suggests that MakeMyTrip has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MakeMyTrip has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year MakeMyTrip wasn't profitable at an EBIT level, but managed to grow its revenue by 118%, to US$414m. So there's no doubt that shareholders are cheering for growth

So How Risky Is MakeMyTrip?

While MakeMyTrip lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$17m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 118% is a good sign. We'd see further strong growth as an optimistic indication. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how MakeMyTrip's profit, revenue, and operating cashflow have changed over the last few years.

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.

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.