Is UIL (KOSDAQ:049520) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that UIL Co., Ltd. (KOSDAQ:049520) does use debt in its business. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for UIL

How Much Debt Does UIL Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 UIL had ₩8.64b of debt, an increase on none, over one year. But it also has ₩42.4b in cash to offset that, meaning it has ₩33.7b net cash.

How Strong Is UIL's Balance Sheet?

The latest balance sheet data shows that UIL had liabilities of ₩40.3b due within a year, and liabilities of ₩20.9b falling due after that. On the other hand, it had cash of ₩42.4b and ₩48.1b worth of receivables due within a year. So it can boast ₩29.4b more liquid assets than total liabilities.

This surplus liquidity suggests that UIL's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, UIL boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since UIL 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 UIL had a loss before interest and tax, and actually shrunk its revenue by 29%, to ₩306b. To be frank that doesn't bode well.

So How Risky Is UIL?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months UIL lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩1.8b of cash and made a loss of ₩6.4b. With only ₩33.7b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for UIL (1 is a bit concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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