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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that UJU Electronics Co. Ltd (KOSDAQ:065680) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for UJU Electronics

How Much Debt Does UJU Electronics Carry?

The chart below, which you can click on for greater detail, shows that UJU Electronics had ₩35.0b in debt in September 2020; about the same as the year before. However, it does have ₩103.4b in cash offsetting this, leading to net cash of ₩68.4b.

How Healthy Is UJU Electronics' Balance Sheet?

We can see from the most recent balance sheet that UJU Electronics had liabilities of ₩66.0b falling due within a year, and liabilities of ₩928.1m due beyond that. On the other hand, it had cash of ₩103.4b and ₩38.4b worth of receivables due within a year. So it actually has ₩74.9b more liquid assets than total liabilities.

This luscious liquidity implies that UJU Electronics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that UJU Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, UJU Electronics grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since UJU Electronics 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. UJU Electronics 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 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 cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that UJU Electronics has net cash of ₩68.4b, as well as more liquid assets than liabilities. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example UJU Electronics has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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