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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Mahindra Lifespace Developers Limited (NSE:MAHLIFE) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
See our latest analysis for Mahindra Lifespace Developers
What Is Mahindra Lifespace Developers's Debt?
As you can see below, Mahindra Lifespace Developers had ₹2.28b of debt at March 2019, down from ₹4.59b a year prior. However, it does have ₹2.68b in cash offsetting this, leading to net cash of ₹400.1m.
How Strong Is Mahindra Lifespace Developers's Balance Sheet?
The latest balance sheet data shows that Mahindra Lifespace Developers had liabilities of ₹9.66b due within a year, and liabilities of ₹544.1m falling due after that. Offsetting this, it had ₹2.68b in cash and ₹3.37b in receivables that were due within 12 months. So it has liabilities totalling ₹4.16b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Mahindra Lifespace Developers is worth ₹19.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Mahindra Lifespace Developers also has more cash than debt, so we're pretty confident it can manage its debt safely.
It is just as well that Mahindra Lifespace Developers's load is not too heavy, because its EBIT was down 85% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Mahindra Lifespace Developers 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.