Is UFO Moviez India (NSE:UFO) A Risky Investment?

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.' 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, UFO Moviez India Limited (NSE:UFO) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for UFO Moviez India

What Is UFO Moviez India's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 UFO Moviez India had debt of ₹860.5m, up from ₹445.5m in one year. However, it does have ₹1.30b in cash offsetting this, leading to net cash of ₹443.7m.

How Healthy Is UFO Moviez India's Balance Sheet?

According to the last reported balance sheet, UFO Moviez India had liabilities of ₹1.96b due within 12 months, and liabilities of ₹1.01b due beyond 12 months. Offsetting these obligations, it had cash of ₹1.30b as well as receivables valued at ₹684.9m due within 12 months. So its liabilities total ₹986.3m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since UFO Moviez India has a market capitalization of ₹2.33b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, UFO Moviez India boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since UFO Moviez India will need earnings to service that debt. 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.

Over 12 months, UFO Moviez India made a loss at the EBIT level, and saw its revenue drop to ₹2.8b, which is a fall of 53%. To be frank that doesn't bode well.

So How Risky Is UFO Moviez India?

Although UFO Moviez India had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₹42m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for UFO Moviez India (1 is a bit concerning) 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. 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.
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