Does Ugar Sugar Works (NSE:UGARSUGAR) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies The Ugar Sugar Works Limited (NSE:UGARSUGAR) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Ugar Sugar Works's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ugar Sugar Works had debt of ₹4.44b, up from ₹2.25b in one year. However, it also had ₹226.1m in cash, and so its net debt is ₹4.21b.

How Strong Is Ugar Sugar Works' Balance Sheet?

The latest balance sheet data shows that Ugar Sugar Works had liabilities of ₹4.22b due within a year, and liabilities of ₹1.27b falling due after that. Offsetting these obligations, it had cash of ₹226.1m as well as receivables valued at ₹580.4m due within 12 months. So its liabilities total ₹4.68b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₹5.39b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ugar Sugar Works's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

See our latest analysis for Ugar Sugar Works

Over 12 months, Ugar Sugar Works made a loss at the EBIT level, and saw its revenue drop to ₹12b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did Ugar Sugar Works's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₹219m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹500m. So in short it's a really risky stock. 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. We've identified 4 warning signs with Ugar Sugar Works (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.