United Spirits (NSE:MCDOWELL-N) Could Easily Take On More 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 United Spirits Limited (NSE:MCDOWELL-N) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for United Spirits

What Is United Spirits's Net Debt?

The image below, which you can click on for greater detail, shows that United Spirits had debt of ₹2.03b at the end of September 2023, a reduction from ₹5.57b over a year. However, its balance sheet shows it holds ₹19.2b in cash, so it actually has ₹17.1b net cash.

How Healthy Is United Spirits' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that United Spirits had liabilities of ₹40.1b due within 12 months and liabilities of ₹2.08b due beyond that. Offsetting these obligations, it had cash of ₹19.2b as well as receivables valued at ₹26.7b due within 12 months. So it can boast ₹3.68b more liquid assets than total liabilities.

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 ₹771.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, United Spirits boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that United Spirits has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if United Spirits can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, United Spirits produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case United Spirits has ₹17.1b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 23% over the last year. So is United Spirits's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for United Spirits you should know about.

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. 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.