Is UCloud Technology (SHSE:688158) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, UCloud Technology Co., Ltd. (SHSE:688158) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 UCloud Technology

How Much Debt Does UCloud Technology Carry?

You can click the graphic below for the historical numbers, but it shows that UCloud Technology had CN¥111.6m of debt in September 2024, down from CN¥159.3m, one year before. But on the other hand it also has CN¥893.6m in cash, leading to a CN¥781.9m net cash position.

A Look At UCloud Technology's Liabilities

According to the last reported balance sheet, UCloud Technology had liabilities of CN¥914.0m due within 12 months, and liabilities of CN¥77.9m due beyond 12 months. On the other hand, it had cash of CN¥893.6m and CN¥473.5m worth of receivables due within a year. So it can boast CN¥375.2m more liquid assets than total liabilities.

This short term liquidity is a sign that UCloud Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, UCloud Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine UCloud Technology'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, UCloud Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 4.6%. We would much prefer see growth.

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. Indeed, in that time it burnt through CN¥516m of cash and made a loss of CN¥224m. But at least it has CN¥781.9m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with UCloud Technology (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.