Is MakeMyTrip (NASDAQ:MMYT) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for MakeMyTrip

How Much Debt Does MakeMyTrip Carry?

As you can see below, at the end of December 2022, MakeMyTrip had US$215.3m of debt, up from US$198.9m a year ago. Click the image for more detail. But it also has US$443.7m in cash to offset that, meaning it has US$228.5m net cash.

A Look At MakeMyTrip's Liabilities

The latest balance sheet data shows that MakeMyTrip had liabilities of US$234.5m due within a year, and liabilities of US$241.5m falling due after that. Offsetting this, it had US$443.7m in cash and US$74.5m in receivables that were due within 12 months. So it actually has US$42.2m 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$2.51b 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$12m. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last year, MakeMyTrip burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MakeMyTrip has net cash of US$228.5m, as well as more liquid assets than liabilities. So while MakeMyTrip does not have a great balance sheet, it's certainly not too bad. 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.