Is Umang Dairies (NSE:UMANGDAIRY) A Risky Investment?

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.' 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, Umang Dairies Limited (NSE:UMANGDAIRY) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Umang Dairies

What Is Umang Dairies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Umang Dairies had ₹414.3m of debt, an increase on ₹201.0m, over one year. However, it does have ₹65.5m in cash offsetting this, leading to net debt of about ₹348.8m.

How Strong Is Umang Dairies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Umang Dairies had liabilities of ₹636.5m due within 12 months and liabilities of ₹307.8m due beyond that. Offsetting these obligations, it had cash of ₹65.5m as well as receivables valued at ₹130.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹748.4m.

Umang Dairies has a market capitalization of ₹1.79b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Umang Dairies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Umang Dairies had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₹2.2b. That's not what we would hope to see.

Caveat Emptor

While Umang Dairies's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₹61m. 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. Another cause for caution is that is bled ₹132m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Umang Dairies (of which 2 are potentially serious!) you should know about.

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.