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

Warren Buffett famously said, '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. We note that UFO Moviez India Limited (NSE:UFO) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for UFO Moviez India

What Is UFO Moviez India's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 UFO Moviez India had debt of ₹1.04b, up from ₹860.5m in one year. On the flip side, it has ₹564.2m in cash leading to net debt of about ₹474.7m.

How Healthy Is UFO Moviez India's Balance Sheet?

We can see from the most recent balance sheet that UFO Moviez India had liabilities of ₹1.48b falling due within a year, and liabilities of ₹1.19b due beyond that. Offsetting these obligations, it had cash of ₹564.2m as well as receivables valued at ₹340.3m due within 12 months. So its liabilities total ₹1.77b more than the combination of its cash and short-term receivables.

UFO Moviez India has a market capitalization of ₹2.97b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since UFO Moviez India 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, UFO Moviez India made a loss at the EBIT level, and saw its revenue drop to ₹1.1b, which is a fall of 61%. To be frank that doesn't bode well.

Caveat Emptor

Not only did UFO Moviez India's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₹1.3b 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. However, it doesn't help that it burned through ₹406m of cash over the last year. So suffice it to say we consider the stock very 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. For example, we've discovered 2 warning signs for UFO Moviez India (1 is a bit concerning!) that you should be aware of before investing here.

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.

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.

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