Does United Breweries (NSE:UBL) Have A Healthy Balance Sheet?

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. Importantly, United Breweries Limited (NSE:UBL) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Breweries

What Is United Breweries's Net Debt?

As you can see below, at the end of March 2023, United Breweries had ₹156.2m of debt, up from ₹97.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹3.37b in cash, so it actually has ₹3.21b net cash.

A Look At United Breweries' Liabilities

The latest balance sheet data shows that United Breweries had liabilities of ₹22.8b due within a year, and liabilities of ₹334.3m falling due after that. On the other hand, it had cash of ₹3.37b and ₹14.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹5.66b.

Having regard to United Breweries' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹408.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, United Breweries boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact United Breweries's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if United Breweries 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 Breweries 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 Breweries recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about United Breweries's liabilities, but we can be reassured by the fact it has has net cash of ₹3.21b. So we don't have any problem with United Breweries's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with United Breweries .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.