Umang Dairies (NSE:UMANGDAIRY) Is Making Moderate Use Of Debt

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.' 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. We can see that Umang Dairies Limited (NSE:UMANGDAIRY) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Umang Dairies

What Is Umang Dairies's Net Debt?

As you can see below, at the end of September 2022, Umang Dairies had ₹474.7m of debt, up from ₹414.3m a year ago. Click the image for more detail. However, it does have ₹25.1m in cash offsetting this, leading to net debt of about ₹449.6m.

How Strong Is Umang Dairies' Balance Sheet?

According to the last reported balance sheet, Umang Dairies had liabilities of ₹561.2m due within 12 months, and liabilities of ₹378.7m due beyond 12 months. Offsetting this, it had ₹25.1m in cash and ₹129.1m in receivables that were due within 12 months. So it has liabilities totalling ₹785.8m more than its cash and near-term receivables, combined.

Umang Dairies has a market capitalization of ₹1.51b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Umang Dairies reported revenue of ₹2.3b, which is a gain of 4.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Umang Dairies produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₹70m 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. Another cause for caution is that is bled ₹52m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Umang Dairies (including 2 which are concerning) .

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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