UANGEL (KRX:072130) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that UANGEL Corporation (KRX:072130) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for UANGEL

What Is UANGEL's Debt?

As you can see below, UANGEL had ₩4.10b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩24.2b in cash to offset that, meaning it has ₩20.1b net cash.

A Look At UANGEL's Liabilities

We can see from the most recent balance sheet that UANGEL had liabilities of ₩9.25b falling due within a year, and liabilities of ₩3.90b due beyond that. Offsetting this, it had ₩24.2b in cash and ₩4.81b in receivables that were due within 12 months. So it actually has ₩15.9b more liquid assets than total liabilities.

This luscious liquidity implies that UANGEL's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that UANGEL has more cash than debt is arguably a good indication that it can manage its debt safely.

Although UANGEL made a loss at the EBIT level, last year, it was also good to see that it generated ₩1.2b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since UANGEL 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While UANGEL 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. Happily for any shareholders, UANGEL actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case UANGEL has ₩20.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩5.8b, being 483% of its EBIT. So we don't think UANGEL's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with UANGEL (at least 1 which is significant) , and understanding them should be part of your investment process.

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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