Is Ujaas Energy (NSE:UJAAS) A Risky Investment?

By
Simply Wall St
Published
November 24, 2021
NSEI:UJAAS
Source: Shutterstock

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Ujaas Energy Limited (NSE:UJAAS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ujaas Energy

What Is Ujaas Energy's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Ujaas Energy had ₹1.18b of debt, an increase on ₹1.03b, over one year. And it doesn't have much cash, so its net debt is about the same.

debt-equity-history-analysis
NSEI:UJAAS Debt to Equity History November 25th 2021

A Look At Ujaas Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Ujaas Energy had liabilities of ₹2.14b due within 12 months and liabilities of ₹60.1m due beyond that. On the other hand, it had cash of ₹14.2m and ₹906.8m worth of receivables due within a year. So it has liabilities totalling ₹1.28b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₹709.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Ujaas Energy would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ujaas Energy's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ujaas Energy made a loss at the EBIT level, and saw its revenue drop to ₹341m, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

While Ujaas Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₹148m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₹978m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Ujaas Energy you should be aware of, and 2 of them are concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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