These 4 Measures Indicate That United Spirits (NSE:MCDOWELL-N) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that United Spirits Limited (NSE:MCDOWELL-N) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for United Spirits

What Is United Spirits's Debt?

As you can see below, United Spirits had ₹1.83b of debt at March 2023, down from ₹6.05b a year prior. But on the other hand it also has ₹3.71b in cash, leading to a ₹1.88b net cash position.

How Strong Is United Spirits' Balance Sheet?

According to the last reported balance sheet, United Spirits had liabilities of ₹36.2b due within 12 months, and liabilities of ₹1.38b due beyond 12 months. Offsetting this, it had ₹3.71b in cash and ₹25.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹8.80b.

Having regard to United Spirits' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₹723.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, United Spirits also has more cash than debt, so we're pretty confident it can manage its debt safely.

While United Spirits doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine United Spirits's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. United Spirits 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, United Spirits recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that United Spirits has ₹1.88b in net cash. And it impressed us with free cash flow of ₹4.8b, being 68% of its EBIT. So is United Spirits's debt a risk? It doesn't seem so to us. 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 example, we've discovered 1 warning sign for United Spirits that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.