Ubiquoss Holdings (KOSDAQ:078070) 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.' 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 Ubiquoss Holdings Inc. (KOSDAQ:078070) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ubiquoss Holdings

What Is Ubiquoss Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Ubiquoss Holdings had debt of ₩2.00b at the end of December 2020, a reduction from ₩5.00b over a year. However, its balance sheet shows it holds ₩181.4b in cash, so it actually has ₩179.4b net cash.

How Strong Is Ubiquoss Holdings' Balance Sheet?

According to the last reported balance sheet, Ubiquoss Holdings had liabilities of ₩34.7b due within 12 months, and liabilities of ₩7.89b due beyond 12 months. Offsetting these obligations, it had cash of ₩181.4b as well as receivables valued at ₩12.0b due within 12 months. So it can boast ₩150.8b more liquid assets than total liabilities.

This surplus strongly suggests that Ubiquoss Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Ubiquoss Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Ubiquoss Holdings grew its EBIT by 58% 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 it is Ubiquoss Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ubiquoss Holdings 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, Ubiquoss Holdings actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case Ubiquoss Holdings has ₩179.4b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩18b, being 105% of its EBIT. The bottom line is that Ubiquoss Holdings's use of debt is absolutely fine. 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. Be aware that Ubiquoss Holdings is showing 2 warning signs in our investment analysis , and 1 of those 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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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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