Does Ucal Fuel Systems (NSE:UCALFUEL) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ucal Fuel Systems Limited (NSE:UCALFUEL) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ucal Fuel Systems

What Is Ucal Fuel Systems's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Ucal Fuel Systems had debt of ₹2.00b, up from ₹1.87b in one year. However, because it has a cash reserve of ₹122.7m, its net debt is less, at about ₹1.88b.

A Look At Ucal Fuel Systems's Liabilities

Zooming in on the latest balance sheet data, we can see that Ucal Fuel Systems had liabilities of ₹3.66b due within 12 months and liabilities of ₹1.08b due beyond that. Offsetting this, it had ₹122.7m in cash and ₹1.17b in receivables that were due within 12 months. So its liabilities total ₹3.44b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₹2.76b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ucal Fuel Systems 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.

Over 12 months, Ucal Fuel Systems made a loss at the EBIT level, and saw its revenue drop to ₹6.0b, which is a fall of 26%. To be frank that doesn't bode well.

Caveat Emptor

While Ucal Fuel Systems's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹32m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₹147m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ucal Fuel Systems is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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