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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, United Breweries Limited (NSE:UBL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for United Breweries

What Is United Breweries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 United Breweries had ₹1.27b of debt, an increase on ₹154.0m, over one year. But on the other hand it also has ₹1.54b in cash, leading to a ₹273.6m net cash position.

A Look At United Breweries' Liabilities

The latest balance sheet data shows that United Breweries had liabilities of ₹28.0b due within a year, and liabilities of ₹374.8m falling due after that. Offsetting this, it had ₹1.54b in cash and ₹24.4b in receivables that were due within 12 months. So its liabilities total ₹2.45b more than the combination of its cash and short-term receivables.

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 ₹499.7b company is short on cash, but still worth keeping an eye on the 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.

On top of that, United Breweries grew its EBIT by 39% 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 last three years, United Breweries recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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 ₹273.6m. And it impressed us with its EBIT growth of 39% over the last year. So we don't have any problem with United Breweries's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for United Breweries you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.