Is Ultima Capital (BRN:ULTIMA) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ultima Capital SA (BRN:ULTIMA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ultima Capital

How Much Debt Does Ultima Capital Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Ultima Capital had CHF556.2m of debt, an increase on CHF479.8m, over one year. On the flip side, it has CHF12.3m in cash leading to net debt of about CHF543.9m.

How Healthy Is Ultima Capital's Balance Sheet?

We can see from the most recent balance sheet that Ultima Capital had liabilities of CHF63.7m falling due within a year, and liabilities of CHF630.2m due beyond that. Offsetting this, it had CHF12.3m in cash and CHF3.81m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF677.8m.

When you consider that this deficiency exceeds the company's CHF520.1m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ultima Capital'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.

In the last year Ultima Capital had a loss before interest and tax, and actually shrunk its revenue by 2.1%, to CHF16m. That's not what we would hope to see.

Caveat Emptor

Importantly, Ultima Capital had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CHF39m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CHF49m. And until that time we think this is a risky stock. 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. Case in point: We've spotted 3 warning signs for Ultima Capital you should be aware of, and 2 of them are significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.