Is Ubtech Robotics (HKG:9880) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Ubtech Robotics Corp Ltd (HKG:9880) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Ubtech Robotics

What Is Ubtech Robotics's Net Debt?

As you can see below, at the end of June 2024, Ubtech Robotics had CN¥1.65b of debt, up from CN¥934.4m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥904.6m, its net debt is less, at about CN¥743.8m.

How Healthy Is Ubtech Robotics' Balance Sheet?

The latest balance sheet data shows that Ubtech Robotics had liabilities of CN¥1.84b due within a year, and liabilities of CN¥785.6m falling due after that. On the other hand, it had cash of CN¥904.6m and CN¥841.0m worth of receivables due within a year. So its liabilities total CN¥883.8m more than the combination of its cash and short-term receivables.

Of course, Ubtech Robotics has a market capitalization of CN¥38.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ubtech Robotics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ubtech Robotics wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to CN¥1.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Ubtech Robotics's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥1.2b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥1.3b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For example - Ubtech Robotics has 2 warning signs we think you should be aware of.

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.