David Iben famously said, “Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.” This statement underscores the focus on avoiding debt when considering a company’s risk profile. Too much debt can jeopardize a company’s sustainability. MakeMyTrip Limited (NASDAQ:MMYT), for instance, carries some debt. The central concern is whether this debt makes the company risky.
Debt can stimulate business growth, but problems arise if a company cannot repay its lenders. This dependency puts the business at the mercy of its creditors. Capitalism often involves a ‘creative destruction’ process where failing businesses are harshly liquidated by their bankers. More commonly yet no less painfully, companies may have to raise new equity capital at a low price, thus permanently diluting shareholders.
Nevertheless, debt is vital for businesses, especially those that are capital-heavy. This debt evaluation is crucial in assessing a company’s riskiness.