Is Universal Technologies Holdings (HKG:1026) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Universal Technologies Holdings Limited (HKG:1026) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Universal Technologies Holdings

How Much Debt Does Universal Technologies Holdings Carry?

As you can see below, Universal Technologies Holdings had HK$876.8m of debt at June 2023, down from HK$1.01b a year prior. On the flip side, it has HK$370.8m in cash leading to net debt of about HK$506.0m.

How Healthy Is Universal Technologies Holdings' Balance Sheet?

We can see from the most recent balance sheet that Universal Technologies Holdings had liabilities of HK$701.2m falling due within a year, and liabilities of HK$700.0m due beyond that. Offsetting this, it had HK$370.8m in cash and HK$60.5m in receivables that were due within 12 months. So it has liabilities totalling HK$969.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$424.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Universal Technologies Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Universal Technologies Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Universal Technologies Holdings made a loss at the EBIT level, and saw its revenue drop to HK$333m, which is a fall of 8.6%. That's not what we would hope to see.

Caveat Emptor

Importantly, Universal Technologies Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$43m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$102m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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 Universal Technologies Holdings is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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.