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

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 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, at the end of June 2022, MakeMyTrip had US$206.9m of debt, up from US$191.8m a year ago. Click the image for more detail. But it also has US$462.5m in cash to offset that, meaning it has US$255.6m net cash.

A Look At MakeMyTrip's Liabilities

According to the last reported balance sheet, MakeMyTrip had liabilities of US$204.6m due within 12 months, and liabilities of US$235.7m due beyond 12 months. Offsetting these obligations, it had cash of US$462.5m as well as receivables valued at US$51.2m due within 12 months. So it can boast US$73.5m 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. Succinctly put, MakeMyTrip boasts net cash, so it's fair to say it does not have a heavy debt load! 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'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 taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 118% is a good sign. We'd see further strong growth as an optimistic indication. For riskier companies like MakeMyTrip I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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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.

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