Does UGE International (CVE:UGE) Have A Healthy Balance Sheet?

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 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 UGE International Ltd. (CVE:UGE) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 UGE International

How Much Debt Does UGE International Carry?

As you can see below, UGE International had US$2.92m of debt at March 2021, down from US$4.56m a year prior. But on the other hand it also has US$3.04m in cash, leading to a US$115.8k net cash position.

How Healthy Is UGE International's Balance Sheet?

We can see from the most recent balance sheet that UGE International had liabilities of US$4.54m falling due within a year, and liabilities of US$4.13m due beyond that. Offsetting this, it had US$3.04m in cash and US$1.74m in receivables that were due within 12 months. So its liabilities total US$3.90m more than the combination of its cash and short-term receivables.

Of course, UGE International has a market capitalization of US$40.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, UGE International boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine UGE International's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, UGE International made a loss at the EBIT level, and saw its revenue drop to US$1.2m, which is a fall of 66%. That makes us nervous, to say the least.

So How Risky Is UGE International?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year UGE International had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$5.1m and booked a US$1.2m accounting loss. Given it only has net cash of US$115.8k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for UGE International (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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