Is MakeMyTrip (NASDAQ:MMYT) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that MakeMyTrip Limited (NASDAQ:MMYT) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 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.

See our latest analysis for MakeMyTrip

How Much Debt Does MakeMyTrip Carry?

As you can see below, at the end of June 2023, MakeMyTrip had US$222.9m of debt, up from US$206.9m a year ago. Click the image for more detail. However, it does have US$516.0m in cash offsetting this, leading to net cash of US$293.1m.

How Strong Is MakeMyTrip's Balance Sheet?

We can see from the most recent balance sheet that MakeMyTrip had liabilities of US$482.3m falling due within a year, and liabilities of US$29.6m due beyond that. Offsetting these obligations, it had cash of US$516.0m as well as receivables valued at US$84.6m due within 12 months. So it can boast US$88.8m more liquid assets than total liabilities.

This short term liquidity is a sign that MakeMyTrip could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MakeMyTrip has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, MakeMyTrip turned things around in the last 12 months, delivering and EBIT of US$36m. 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, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, MakeMyTrip actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case MakeMyTrip has US$293.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$60m, being 165% of its EBIT. So is MakeMyTrip's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in MakeMyTrip, you may well want to click here to check an interactive graph of its earnings per share history.

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.