Is United Breweries (NSE:UBL) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies United Breweries Limited (NSE:UBL) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for United Breweries

How Much Debt Does United Breweries Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 United Breweries had ₹2.19b of debt, an increase on ₹2.10b, over one year. But it also has ₹6.50b in cash to offset that, meaning it has ₹4.32b net cash.

A Look At United Breweries' Liabilities

We can see from the most recent balance sheet that United Breweries had liabilities of ₹17.7b falling due within a year, and liabilities of ₹1.30b due beyond that. Offsetting this, it had ₹6.50b in cash and ₹11.6b in receivables that were due within 12 months. So its liabilities total ₹962.9m more than the combination of its cash and short-term receivables.

This state of affairs indicates that United Breweries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹412.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, United Breweries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that United Breweries grew its EBIT by 536% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if United Breweries 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While United Breweries has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, United Breweries recorded free cash flow worth 64% 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

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 ₹4.32b. And it impressed us with its EBIT growth of 536% over the last year. So is United Breweries's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of United Breweries's earnings per share history for free.

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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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.