Is UFO Moviez India (NSE:UFO) Using Debt In A Risky Way?

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. We can see that UFO Moviez India Limited (NSE:UFO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Net Debt?

As you can see below, at the end of March 2022, UFO Moviez India had ₹951.5m of debt, up from ₹706.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹1.05b in cash, so it actually has ₹100.7m net cash.

A Look At UFO Moviez India's Liabilities

The latest balance sheet data shows that UFO Moviez India had liabilities of ₹1.51b due within a year, and liabilities of ₹1.04b falling due after that. On the other hand, it had cash of ₹1.05b and ₹689.7m worth of receivables due within a year. So it has liabilities totalling ₹809.8m more than its cash and near-term receivables, combined.

Of course, UFO Moviez India has a market capitalization of ₹4.76b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Over 12 months, UFO Moviez India reported revenue of ₹2.2b, which is a gain of 128%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is UFO Moviez India?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year UFO Moviez India had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₹396m of cash and made a loss of ₹627m. Given it only has net cash of ₹100.7m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, UFO Moviez India's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Be aware that UFO Moviez India is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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. 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.