UFO Moviez India (NSE:UFO) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies UFO Moviez India Limited (NSE:UFO) makes use of debt. But the more important question is: how much risk is that debt creating?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for UFO Moviez India

How Much Debt Does UFO Moviez India Carry?

The image below, which you can click on for greater detail, shows that UFO Moviez India had debt of ₹588.8m at the end of September 2024, a reduction from ₹685.4m over a year. But it also has ₹947.3m in cash to offset that, meaning it has ₹358.5m net cash.

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 ₹1.38b due within 12 months and liabilities of ₹1.15b due beyond that. On the other hand, it had cash of ₹947.3m and ₹879.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹698.8m.

This deficit isn't so bad because UFO Moviez India is worth ₹3.44b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

If UFO Moviez India can keep growing EBIT at last year's rate of 13% over the last year, then it will find its debt load easier to manage. When analysing debt levels, the balance sheet is the obvious place to start. But it is UFO Moviez India's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 most recent two years, UFO Moviez India recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While UFO Moviez India does have more liabilities than liquid assets, it also has net cash of ₹358.5m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with UFO Moviez India , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.