Does Ubiquoss (KOSDAQ:264450) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ubiquoss Inc. (KOSDAQ:264450) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ubiquoss

What Is Ubiquoss's Debt?

The image below, which you can click on for greater detail, shows that Ubiquoss had debt of ₩2.00b at the end of September 2020, a reduction from ₩5.00b over a year. However, it does have ₩74.9b in cash offsetting this, leading to net cash of ₩72.9b.

How Healthy Is Ubiquoss's Balance Sheet?

The latest balance sheet data shows that Ubiquoss had liabilities of ₩23.7b due within a year, and liabilities of ₩6.34b falling due after that. Offsetting these obligations, it had cash of ₩74.9b as well as receivables valued at ₩10.5b due within 12 months. So it can boast ₩55.4b more liquid assets than total liabilities.

This surplus suggests that Ubiquoss is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Ubiquoss 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 Ubiquoss has boosted its EBIT by 42%, 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 Ubiquoss'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ubiquoss 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 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 we empathize with investors who find debt concerning, you should keep in mind that Ubiquoss has net cash of ₩72.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩27b, being 102% of its EBIT. The bottom line is that we do not find Ubiquoss's debt levels at all concerning. 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. Take risks, for example - Ubiquoss has 1 warning sign we think you should be aware of.

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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