We think Univastu India (NSE:UNIVASTU) is taking risks with its debt
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Univastu India Limited (NSE: UNIVASTU) is in debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Univastu India
How much debt does Univastu India carry?
The image below, which you can click for more details, shows that Univastu India had debt of ₹333.6 million at the end of March 2022, a reduction from ₹397.0 million year on year . On the other hand, he has ₹45.9 million in cash, resulting in a net debt of around ₹287.7 million.
A Look at Univastu India’s Responsibilities
We can see from the most recent balance sheet that Univastu India had liabilities of ₹525.5 million due within a year, and liabilities of ₹206.7 million due beyond. As compensation for these obligations, it had cash of ₹45.9 million as well as receivables valued at ₹837.5 million due within 12 months. He can therefore boast of having ₹151.2 million more liquid assets than total Passives.
This excess liquidity suggests that Univastu India is taking a cautious approach to debt. Given that he has easily sufficient short-term cash, we don’t think he will have any problems with his lenders.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
While Univastu India has a quite reasonable net debt to EBITDA ratio of 2.3, its interest coverage looks low at 2.4. This leads us to wonder if the company is paying high interest because it is considered risky. Either way, it’s safe to say that the company has significant debt. Shareholders should know that Univastu India’s EBIT fell by 36% last year. If this decline continues, it will be more difficult to repay debts than to sell foie gras at a vegan convention. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Univastu India that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Univastu India has recorded free cash flow of 19% of its EBIT, which is really quite low. This low level of cash conversion compromises its ability to manage and repay its debt.
Our point of view
Univastu India’s struggle to increase EBIT made us doubt the strength of its balance sheet, but other data points we considered were relatively rewarding. But on the bright side, his ability to manage his total liabilities isn’t too shabby at all. Considering the above factors, we believe that Univastu India’s debt poses certain risks to the business. So even if this leverage increases return on equity, we wouldn’t really want to see it increase from now on. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 4 warning signs with Univastu India (at least 2 which we don’t like too much), and understanding them should be part of your investment process.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.