The external fund manager led by Charlie Munger from Berkshire Hathaway, Li Lu, makes no secret of it when he says: “The greatest investment risk is not the volatility of prices, but whether you suffer a permanent loss of capital.” So it might be obvious that you need to consider debt when thinking about how risky a particular stock is, as too much debt can bring a company down. We make a note of that Univastu India Limited (NSE: UNIVASTU) has debt on its balance sheet. But the real question is whether these debts make the company risky.
When is debt dangerous?
In general, debt doesn’t become a real problem until a company can’t simply pay it off, whether by raising capital or using its own cash flow. An integral part of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. However, a more common (but still more painful) scenario is that it needs to raise new equity at a low price, permanently diluting shareholders. However, in replacing the dilution, debt can be an extremely good tool for companies that need capital to invest in high-yielding growth. The first thing to do when considering how much debt a company uses is to put its cash and debt together.
Check out our latest analysis for Univastu India
What are Univastu India’s debts?
The image below, which you can click for more details, shows that Univastu India had a debt of 397.0 million yen in March 2021, compared to 323.3 million yen in one year. On the flip side, it has 55.1 million in cash, resulting in a net debt of approximately 341.9 million.
NSEI: UNIVASTU Debt to Equity History June 28, 2021
How strong is Univastu India’s record?
If we zoom in on the latest balance sheet data, we can see that Univastu India had liabilities of 624.6 million and beyond that, liabilities of 255.7 million within 12 months. In return for these obligations, it had liquid funds in the amount of 55.1 million as well as receivables in the amount of 958.1 million, which are due within 12 months. So it actually has ₹ 132.9 million more cash than total liabilities.
It is good to see that Univastu India has a lot of liquidity on its balance sheet, which suggests conservative management of liabilities. Since it has many assets, it is unlikely to have any problems with its lenders.
We measure a company’s debt burden in relation to its profitability by dividing its net debt by earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily earnings before interest and taxes (EBIT) cover its interest costs (interest coverage ). We therefore look at debt in relation to earnings, both with and without depreciation and amortization.
Univastu India has net debt at 1.7x EBITDA, which isn’t too much, but interest coverage looks a bit low, with EBIT only 3.4x interest expense. While this doesn’t worry us too much, it does suggest that the interest payments are a bit of a burden. It is noteworthy that Univastu India’s EBIT has shot up like bamboo after the rain, increasing by 90% in the past twelve months. That makes it easier to manage your debt. Undoubtedly, we learn the most about balance sheet debt. But it is the result of Univastu India that will affect the future balance sheet structure. So when looking at debt, it’s definitely worth taking a look at earnings trends. Click here for an interactive snapshot.
After all, while tax advisors may worship book profits, lenders only accept cold cash. So the logical step is to look at the portion of this EBIT that corresponds to the actual free cash flow. Overall, Univastu India has had a significant negative free cash flow over the past three years. While this may be due to growth spending, it makes debt a lot riskier.
Our view
The good news is that Univastu India’s proven ability to grow EBIT delights us like a fluffy puppy does a toddler. But the bare truth is that we’re worried about converting EBIT to free cash flow. If you look at all of the above factors together, we notice that Univastu India can handle its debts quite comfortably. On the plus side, this leverage can increase shareholder returns, but the potential downside is a higher risk of loss, so it’s worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. However, not the entire investment risk is on the balance sheet – on the contrary. Case in point: we have discovered 4 warning signs for Univastu India You should be aware of this and 3 of them are worrying.
If you’re interested in investing in companies that can grow profits without the burden of debt, then this is the place to be free List of growing companies that have net cash on their balance sheet.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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source https://dailyhealthynews.ca/does-univastu-india-nseunivastu-have-a-healthy-balance-sheet/
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