UFO Moviez India (NSE:UFO) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. 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 UFO Moviez India Limited (NSE:UFO) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 UFO Moviez India

What Is UFO Moviez India's Debt?

The image below, which you can click on for greater detail, shows that UFO Moviez India had debt of ₹445.5m at the end of September 2019, a reduction from ₹478.7m over a year. However, its balance sheet shows it holds ₹1.52b in cash, so it actually has ₹1.08b net cash.

A Look At UFO Moviez India's Liabilities

According to the last reported balance sheet, UFO Moviez India had liabilities of ₹2.01b due within 12 months, and liabilities of ₹915.5m due beyond 12 months. Offsetting these obligations, it had cash of ₹1.52b as well as receivables valued at ₹1.50b due within 12 months. So it actually has ₹94.7m more liquid assets than total liabilities.

This short term liquidity is a sign that UFO Moviez India could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that UFO Moviez India has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, UFO Moviez India grew its EBIT by 3.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since UFO Moviez India will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. UFO Moviez India 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 most recent three years, UFO Moviez India recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that UFO Moviez India has net cash of ₹1.08b, as well as more liquid assets than liabilities. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in ₹821m. So is UFO Moviez India's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for UFO Moviez India that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.