Is UbiVelox (KOSDAQ:089850) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that UbiVelox Inc. (KOSDAQ:089850) does have debt on its balance sheet. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for UbiVelox

What Is UbiVelox's Net Debt?

The chart below, which you can click on for greater detail, shows that UbiVelox had ₩77.6b in debt in September 2020; about the same as the year before. However, it does have ₩78.8b in cash offsetting this, leading to net cash of ₩1.17b.

How Strong Is UbiVelox's Balance Sheet?

According to the last reported balance sheet, UbiVelox had liabilities of ₩98.8b due within 12 months, and liabilities of ₩16.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩78.8b as well as receivables valued at ₩28.4b due within 12 months. So its liabilities total ₩8.23b more than the combination of its cash and short-term receivables.

Of course, UbiVelox has a market capitalization of ₩66.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, UbiVelox boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that UbiVelox grew its EBIT by 248% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is UbiVelox'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While UbiVelox 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 last three years, UbiVelox actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While UbiVelox does have more liabilities than liquid assets, it also has net cash of ₩1.17b. And it impressed us with free cash flow of ₩21b, being 159% of its EBIT. So we don't think UbiVelox's use of debt is 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. To that end, you should be aware of the 3 warning signs we've spotted with UbiVelox .

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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