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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies UFO Moviez India Limited (NSE:UFO) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

You can click the graphic below for the historical numbers, but it shows that UFO Moviez India had ₹521.7m of debt in March 2024, down from ₹805.4m, one year before. But on the other hand it also has ₹1.07b in cash, leading to a ₹552.0m net cash position.

A Look At UFO Moviez India's Liabilities

We can see from the most recent balance sheet that UFO Moviez India had liabilities of ₹1.45b falling due within a year, and liabilities of ₹1.08b due beyond that. On the other hand, it had cash of ₹1.07b and ₹973.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹489.1m.

Of course, UFO Moviez India has a market capitalization of ₹5.23b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Notably, UFO Moviez India made a loss at the EBIT level, last year, but improved that to positive EBIT of ₹262m in the last twelve months. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While UFO Moviez India has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, UFO Moviez India actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that UFO Moviez India has ₹552.0m in net cash. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in ₹471m. So we are not troubled with UFO Moviez India's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for UFO Moviez India (of which 1 is concerning!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com