These 4 Measures Indicate That Union Technologies Informatique Group (EPA:FPG) Is Using Debt Reasonably Well

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Union Technologies Informatique Group S.A. (EPA:FPG) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Union Technologies Informatique Group

What Is Union Technologies Informatique Group's Debt?

As you can see below, at the end of December 2020, Union Technologies Informatique Group had €1.86m of debt, up from €1.34m a year ago. Click the image for more detail. But it also has €2.23m in cash to offset that, meaning it has €363.0k net cash.

How Healthy Is Union Technologies Informatique Group's Balance Sheet?

We can see from the most recent balance sheet that Union Technologies Informatique Group had liabilities of €8.50m falling due within a year, and liabilities of €4.58m due beyond that. Offsetting this, it had €2.23m in cash and €1.67m in receivables that were due within 12 months. So it has liabilities totalling €9.17m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €4.92m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Union Technologies Informatique Group would likely require a major re-capitalisation if it had to pay its creditors today. Given that Union Technologies Informatique Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

On top of that, Union Technologies Informatique Group grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Union Technologies Informatique Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Union Technologies Informatique Group 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. Over the most recent three years, Union Technologies Informatique Group recorded free cash flow worth 79% 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

While Union Technologies Informatique Group does have more liabilities than liquid assets, it also has net cash of €363.0k. And we liked the look of last year's 58% year-on-year EBIT growth. So we don't have any problem with Union Technologies Informatique Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Union Technologies Informatique Group you should be aware of, and 2 of them are a bit concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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