Is UJU Electronics (KOSDAQ:065680) Using Too Much Debt?

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.' 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. As with many other companies UJU Electronics Co. Ltd (KOSDAQ:065680) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 UJU Electronics

How Much Debt Does UJU Electronics Carry?

As you can see below, UJU Electronics had ₩35.0b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩103.4b in cash, so it actually has ₩68.4b net cash.

A Look At UJU Electronics's Liabilities

Zooming in on the latest balance sheet data, we can see that UJU Electronics had liabilities of ₩66.0b due within 12 months and liabilities of ₩928.1m due beyond that. Offsetting this, it had ₩103.4b in cash and ₩38.4b in receivables that were due within 12 months. So it actually has ₩74.9b more liquid assets than total liabilities.

It's good to see that UJU Electronics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, UJU Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that UJU Electronics has boosted its EBIT by 50%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is UJU Electronics'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While UJU Electronics 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 most recent three years, UJU Electronics recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case UJU Electronics has ₩68.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 50% over the last year. So is UJU Electronics'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 learn about the 2 warning signs we've spotted with UJU Electronics (including 1 which is makes us a bit uncomfortable) .

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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