Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that UFO Moviez India Limited (NSE:UFO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
Check out our latest analysis for UFO Moviez India
What Is UFO Moviez India's Net Debt?
You can click the graphic below for the historical numbers, but it shows that UFO Moviez India had ₹607.3m of debt in March 2021, down from ₹700.8m, one year before. However, its balance sheet shows it holds ₹750.3m in cash, so it actually has ₹143.0m net cash.
How Strong Is UFO Moviez India's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that UFO Moviez India had liabilities of ₹1.39b due within 12 months and liabilities of ₹1.17b due beyond that. Offsetting this, it had ₹750.3m in cash and ₹422.5m in receivables that were due within 12 months. So it has liabilities totalling ₹1.38b more than its cash and near-term receivables, combined.
This deficit isn't so bad because UFO Moviez India is worth ₹3.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, UFO Moviez India also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year UFO Moviez India had a loss before interest and tax, and actually shrunk its revenue by 83%, to ₹876m. To be frank that doesn't bode well.
So How Risky Is UFO Moviez India?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months UFO Moviez India lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₹407m and booked a ₹1.2b accounting loss. With only ₹143.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for UFO Moviez India you should be aware of, and 1 of them is 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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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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About NSEI:UFO
UFO Moviez India
Provides digital cinema services in India, the Middle East, and internationally.
Solid track record with excellent balance sheet.