United Spirits (NSE:MCDOWELL-N) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, United Spirits Limited (NSE:MCDOWELL-N) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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 United Spirits

What Is United Spirits's Debt?

The image below, which you can click on for greater detail, shows that United Spirits had debt of ₹3.33b at the end of September 2022, a reduction from ₹7.71b over a year. But it also has ₹13.1b in cash to offset that, meaning it has ₹9.81b net cash.

A Look At United Spirits' Liabilities

According to the last reported balance sheet, United Spirits had liabilities of ₹42.4b due within 12 months, and liabilities of ₹1.96b due beyond 12 months. On the other hand, it had cash of ₹13.1b and ₹21.7b worth of receivables due within a year. So it has liabilities totalling ₹9.51b more than its cash and near-term receivables, combined.

This state of affairs indicates that United Spirits' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹613.6b company is short on cash, but still worth keeping an eye on the 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.

Also good is that United Spirits grew its EBIT at 20% over the last year, further increasing its ability to manage 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, United Spirits recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about United Spirits's liabilities, but we can be reassured by the fact it has has net cash of ₹9.81b. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in ₹10b. So we don't think United Spirits's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in United Spirits, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.