Is Ujaas Energy (NSE:UJAAS) Using Too Much Debt?

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. We note that Ujaas Energy Limited (NSE:UJAAS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ujaas Energy

How Much Debt Does Ujaas Energy Carry?

You can click the graphic below for the historical numbers, but it shows that Ujaas Energy had ₹972.6m of debt in March 2020, down from ₹1.41b, one year before. On the flip side, it has ₹140.5m in cash leading to net debt of about ₹832.0m.

A Look At Ujaas Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Ujaas Energy had liabilities of ₹545.7m due within 12 months and liabilities of ₹853.2m due beyond that. Offsetting these obligations, it had cash of ₹140.5m as well as receivables valued at ₹1.01b due within 12 months. So it has liabilities totalling ₹247.6m more than its cash and near-term receivables, combined.

Ujaas Energy has a market capitalization of ₹862.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ujaas Energy 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, Ujaas Energy made a loss at the EBIT level, and saw its revenue drop to ₹526m, which is a fall of 59%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Ujaas Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₹163.4m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹130.1m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Ujaas Energy (1 is a bit unpleasant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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