UBIVELOX (KOSDAQ:089850) Could Easily Take On More 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. Importantly, UBIVELOX Inc (KOSDAQ:089850) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for UBIVELOX

How Much Debt Does UBIVELOX Carry?

As you can see below, UBIVELOX had ₩77.6b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩78.8b in cash, leading to a ₩1.17b net cash position.

A Look At UBIVELOX's Liabilities

The latest balance sheet data shows that UBIVELOX had liabilities of ₩98.8b due within a year, and liabilities of ₩16.6b falling due after that. Offsetting this, it had ₩78.8b in cash and ₩28.4b in receivables that were due within 12 months. So it has liabilities totalling ₩8.23b more than its cash and near-term receivables, combined.

Since publicly traded UBIVELOX shares are worth a total of ₩80.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, UBIVELOX also has more cash than debt, so we're pretty confident it can manage its debt safely.

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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since UBIVELOX 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. UBIVELOX may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, UBIVELOX actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While UBIVELOX does have more liabilities than liquid assets, it also has net cash of ₩1.17b. The cherry on top was that in converted 159% of that EBIT to free cash flow, bringing in ₩21b. So is UBIVELOX's debt a risk? It doesn't seem so to us. 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 4 warning signs we've spotted with UBIVELOX .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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