In This Article:
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, MMTC Limited (NSE:MMTC) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
View our latest analysis for MMTC
What Is MMTC's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 MMTC had ₹9.61b of debt, an increase on ₹5.19b, over one year. However, it does have ₹1.43b in cash offsetting this, leading to net debt of about ₹8.19b.
A Look At MMTC's Liabilities
According to the last reported balance sheet, MMTC had liabilities of ₹29.2b due within 12 months, and liabilities of ₹1.89b due beyond 12 months. Offsetting this, it had ₹1.43b in cash and ₹5.05b in receivables that were due within 12 months. So it has liabilities totalling ₹24.6b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of ₹31.0b, so it does suggest shareholders should keep an eye on MMTC's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
While we wouldn't worry about MMTC's net debt to EBITDA ratio of 4.1, we think its super-low interest cover of 2.3 times is a sign of high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. The silver lining is that MMTC grew its EBIT by 201% last year, which nourishing like the idealism of youth. If it can keep walking that path it will be in a position to shed its debt with relative ease. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since MMTC will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.