Is Universal Technologies Holdings (HKG:1026) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Universal Technologies Holdings Limited (HKG:1026) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Universal Technologies Holdings

How Much Debt Does Universal Technologies Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Universal Technologies Holdings had HK$1.09b of debt in December 2021, down from HK$1.24b, one year before. However, because it has a cash reserve of HK$866.3m, its net debt is less, at about HK$225.7m.

How Healthy Is Universal Technologies Holdings' Balance Sheet?

According to the last reported balance sheet, Universal Technologies Holdings had liabilities of HK$642.8m due within 12 months, and liabilities of HK$929.5m due beyond 12 months. On the other hand, it had cash of HK$866.3m and HK$70.1m worth of receivables due within a year. So it has liabilities totalling HK$636.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$727.7m, so it does suggest shareholders should keep an eye on Universal Technologies Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Universal Technologies Holdings 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.

In the last year Universal Technologies Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 6.9%, to HK$369m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Universal Technologies Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$22m 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. For example, we would not want to see a repeat of last year's loss of HK$39m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Universal Technologies Holdings (including 1 which can't be ignored) .

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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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.