The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that UCloud Technology Co., Ltd. (SHSE:688158) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
How Much Debt Does UCloud Technology Carry?
The image below, which you can click on for greater detail, shows that UCloud Technology had debt of CN¥161.3m at the end of September 2023, a reduction from CN¥186.2m over a year. However, its balance sheet shows it holds CN¥1.44b in cash, so it actually has CN¥1.28b net cash.
A Look At UCloud Technology's Liabilities
We can see from the most recent balance sheet that UCloud Technology had liabilities of CN¥1.06b falling due within a year, and liabilities of CN¥115.4m due beyond that. Offsetting this, it had CN¥1.44b in cash and CN¥500.6m in receivables that were due within 12 months. So it actually has CN¥764.6m more liquid assets than total liabilities.
This surplus suggests that UCloud Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, UCloud Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since UCloud Technology 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.
Over 12 months, UCloud Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 23%. To be frank that doesn't bode well.
So How Risky Is UCloud Technology?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months UCloud Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥164m and booked a CN¥324m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.28b. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 1 warning sign with UCloud Technology , 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.