Is United Breweries (NSE:UBL) Using Too Much 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.' 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 Breweries Limited (NSE:UBL) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for United Breweries

How Much Debt Does United Breweries Carry?

The image below, which you can click on for greater detail, shows that at March 2024 United Breweries had debt of ₹774.1m, up from none in one year. But on the other hand it also has ₹2.14b in cash, leading to a ₹1.37b net cash position.

How Strong Is United Breweries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that United Breweries had liabilities of ₹28.3b due within 12 months and liabilities of ₹406.8m due beyond that. On the other hand, it had cash of ₹2.14b and ₹23.2b worth of receivables due within a year. So its liabilities total ₹3.39b 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 ₹494.6b company is struggling for cash, we still think it's worth monitoring its 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!

Also good is that United Breweries grew its EBIT at 18% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine United Breweries'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 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. Looking at the most recent three years, United Breweries recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 ₹1.37b. And it impressed us with its EBIT growth of 18% over the last year. So we don't have any problem with United Breweries's use of debt. 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. Be aware that United Breweries is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.