United Breweries (NSE:UBL) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Breweries Limited (NSE:UBL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for United Breweries

What Is United Breweries's Debt?

As you can see below, at the end of March 2024, United Breweries had ₹1.02b of debt, up from ₹156.2m a year ago. Click the image for more detail. But on the other hand it also has ₹1.42b in cash, leading to a ₹404.0m net cash position.

How Healthy 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. Offsetting this, it had ₹1.42b in cash and ₹23.2b in receivables that were due within 12 months. So it has liabilities totalling ₹4.11b more than its cash and near-term receivables, combined.

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 it's very unlikely that the ₹567.1b 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!

On top of that, United Breweries grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its 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'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 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 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that United Breweries has ₹404.0m in net cash. And it impressed us with its EBIT growth of 45% over the last year. So we don't think United Breweries's use of debt is risky. 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 1 warning sign we've spotted with United Breweries .

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.