Here's Why UCAP Cloud Information TechnologyLtd (SHSE:688228) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies UCAP Cloud Information Technology Co.,Ltd. (SHSE:688228) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for UCAP Cloud Information TechnologyLtd

What Is UCAP Cloud Information TechnologyLtd's Debt?

As you can see below, at the end of September 2024, UCAP Cloud Information TechnologyLtd had CN¥179.7m of debt, up from CN¥152.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥496.6m in cash, so it actually has CN¥317.0m net cash.

How Healthy Is UCAP Cloud Information TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that UCAP Cloud Information TechnologyLtd had liabilities of CN¥369.1m falling due within a year, and liabilities of CN¥127.0m due beyond that. Offsetting this, it had CN¥496.6m in cash and CN¥438.4m in receivables that were due within 12 months. So it can boast CN¥438.9m more liquid assets than total liabilities.

This surplus suggests that UCAP Cloud Information TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that UCAP Cloud Information TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, UCAP Cloud Information TechnologyLtd grew its EBIT by 128% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since UCAP Cloud Information TechnologyLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While UCAP Cloud Information TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, UCAP Cloud Information TechnologyLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case UCAP Cloud Information TechnologyLtd has CN¥317.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 128% year-on-year EBIT growth. So we are not troubled with UCAP Cloud Information TechnologyLtd's debt use. 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. Be aware that UCAP Cloud Information TechnologyLtd is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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.