We Think MakeMyTrip (NASDAQ:MMYT) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, MakeMyTrip Limited (NASDAQ:MMYT) does carry debt. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MakeMyTrip

What Is MakeMyTrip's Net Debt?

As you can see below, at the end of December 2023, MakeMyTrip had US$231.5m of debt, up from US$215.3m a year ago. Click the image for more detail. But it also has US$606.6m in cash to offset that, meaning it has US$375.1m net cash.

How Strong Is MakeMyTrip's Balance Sheet?

We can see from the most recent balance sheet that MakeMyTrip had liabilities of US$547.1m falling due within a year, and liabilities of US$37.2m due beyond that. Offsetting this, it had US$606.6m in cash and US$92.7m in receivables that were due within 12 months. So it can boast US$115.0m more liquid assets than total liabilities.

This state of affairs indicates that MakeMyTrip's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$7.48b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that MakeMyTrip has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that MakeMyTrip grew its EBIT by 334% over twelve months. That boost will make it even easier to pay down debt going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case MakeMyTrip has US$375.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$154m, being 183% 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for MakeMyTrip that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.