These 4 Measures Indicate That MakeMyTrip (NASDAQ:MMYT) Is Using Debt Safely

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.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for MakeMyTrip

What Is MakeMyTrip's Debt?

The image below, which you can click on for greater detail, shows that MakeMyTrip had debt of US$212.7m at the end of September 2024, a reduction from US$227.3m over a year. However, its balance sheet shows it holds US$715.9m in cash, so it actually has US$503.3m net cash.

How Healthy Is MakeMyTrip's Balance Sheet?

The latest balance sheet data shows that MakeMyTrip had liabilities of US$353.7m due within a year, and liabilities of US$253.8m falling due after that. On the other hand, it had cash of US$715.9m and US$139.8m worth of receivables due within a year. So it actually has US$248.2m 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. 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 105% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 three years, MakeMyTrip actually produced more free cash flow than EBIT. 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$503.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$166m, being 172% of its EBIT. So we don't think MakeMyTrip's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with MakeMyTrip .

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.