u-blox Holding (VTX:UBXN) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that u-blox Holding AG (VTX:UBXN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 u-blox Holding

What Is u-blox Holding's Net Debt?

The image below, which you can click on for greater detail, shows that u-blox Holding had debt of CHF59.9m at the end of June 2022, a reduction from CHF85.8m over a year. However, its balance sheet shows it holds CHF89.3m in cash, so it actually has CHF29.4m net cash.

How Strong Is u-blox Holding's Balance Sheet?

The latest balance sheet data shows that u-blox Holding had liabilities of CHF152.0m due within a year, and liabilities of CHF56.4m falling due after that. Offsetting this, it had CHF89.3m in cash and CHF107.2m in receivables that were due within 12 months. So its liabilities total CHF12.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that u-blox Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CHF831.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, u-blox Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that u-blox Holding grew its EBIT by 1,012% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine u-blox Holding'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. u-blox Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, u-blox Holding recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about u-blox Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF29.4m. And we liked the look of last year's 1,012% year-on-year EBIT growth. So we don't think u-blox Holding's use of debt is risky. 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. For example - u-blox Holding has 1 warning sign we think you should be aware of.

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.