Here's Why UTI (KOSDAQ:179900) Can Afford Some 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 note that UTI Inc. (KOSDAQ:179900) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for UTI

How Much Debt Does UTI Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 UTI had ₩21.9b of debt, an increase on ₩16.1b, over one year. However, it also had ₩17.4b in cash, and so its net debt is ₩4.46b.

How Strong Is UTI's Balance Sheet?

We can see from the most recent balance sheet that UTI had liabilities of ₩27.8b falling due within a year, and liabilities of ₩2.55b due beyond that. Offsetting this, it had ₩17.4b in cash and ₩10.8b in receivables that were due within 12 months. So it has liabilities totalling ₩2.18b more than its cash and near-term receivables, combined.

Having regard to UTI's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩187.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is UTI'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.

In the last year UTI had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₩59b. We would much prefer see growth.

Caveat Emptor

While UTI's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩1.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩10b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for UTI (of which 1 makes us a bit uncomfortable!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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