Is UFO Moviez India (NSE:UFO) Using Too Much Debt?

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 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.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for UFO Moviez India

What Is UFO Moviez India's Net Debt?

As you can see below, UFO Moviez India had ₹805.4m of debt at March 2023, down from ₹869.4m a year prior. However, it does have ₹682.8m in cash offsetting this, leading to net debt of about ₹122.6m.

A Look At UFO Moviez India's Liabilities

Zooming in on the latest balance sheet data, we can see that UFO Moviez India had liabilities of ₹1.73b due within 12 months and liabilities of ₹897.9m due beyond that. On the other hand, it had cash of ₹682.8m and ₹666.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹1.28b.

This deficit isn't so bad because UFO Moviez India is worth ₹3.26b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 147%, to ₹4.0b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, UFO Moviez India still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹145m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₹224m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 2 warning signs in our investment analysis , and 1 of those can't be ignored...

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.

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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.