These 4 Measures Indicate That United Spirits (NSE:UNITDSPR) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies United Spirits Limited (NSE:UNITDSPR) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for United Spirits

What Is United Spirits's Debt?

As you can see below, at the end of September 2024, United Spirits had ₹5.18b of debt, up from ₹2.03b a year ago. Click the image for more detail. But on the other hand it also has ₹21.0b in cash, leading to a ₹15.8b net cash position.

How Strong Is United Spirits' Balance Sheet?

The latest balance sheet data shows that United Spirits had liabilities of ₹38.5b due within a year, and liabilities of ₹4.75b falling due after that. On the other hand, it had cash of ₹21.0b and ₹34.8b worth of receivables due within a year. So it actually has ₹12.6b more liquid assets than total liabilities.

This state of affairs indicates that United Spirits' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹986.7b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that United Spirits has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that United Spirits grew its EBIT by 13% last year, making its debt load easier to handle. 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 Spirits'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While United Spirits 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 most recent three years, United Spirits recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case United Spirits has ₹15.8b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 13% in the last twelve months. So is United Spirits's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of United Spirits's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.