Is Universal Technologies Holdings (HKG:1026) Weighed On By Its Debt Load?

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?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Universal Technologies Holdings

How Much Debt Does Universal Technologies Holdings Carry?

The image below, which you can click on for greater detail, shows that Universal Technologies Holdings had debt of HK$866.8m at the end of December 2023, a reduction from HK$950.0m over a year. On the flip side, it has HK$229.7m in cash leading to net debt of about HK$637.1m.

How Healthy Is Universal Technologies Holdings' Balance Sheet?

The latest balance sheet data shows that Universal Technologies Holdings had liabilities of HK$785.1m due within a year, and liabilities of HK$643.8m falling due after that. Offsetting these obligations, it had cash of HK$229.7m as well as receivables valued at HK$132.8m due within 12 months. So its liabilities total HK$1.07b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$512.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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 it is Universal Technologies Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Universal Technologies Holdings had a loss before interest and tax, and actually shrunk its revenue by 8.6%, to HK$319m. We would much prefer see growth.

Caveat Emptor

Importantly, Universal Technologies Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$49m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$137m. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Universal Technologies Holdings (of which 2 can't be ignored!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.