We Think Ubiquoss (KOSDAQ:264450) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Ubiquoss Inc. (KOSDAQ:264450) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ubiquoss

What Is Ubiquoss's Debt?

You can click the graphic below for the historical numbers, but it shows that Ubiquoss had ₩2.00b of debt in December 2020, down from ₩5.00b, one year before. But on the other hand it also has ₩86.7b in cash, leading to a ₩84.7b net cash position.

How Strong Is Ubiquoss' Balance Sheet?

We can see from the most recent balance sheet that Ubiquoss had liabilities of ₩34.1b falling due within a year, and liabilities of ₩5.88b due beyond that. On the other hand, it had cash of ₩86.7b and ₩9.13b worth of receivables due within a year. So it actually has ₩55.8b more liquid assets than total liabilities.

This excess liquidity suggests that Ubiquoss is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Ubiquoss boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Ubiquoss grew its EBIT by 55% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ubiquoss 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.

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. Over the last three years, Ubiquoss actually produced more free cash flow than EBIT. 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 ₩84.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩19b, being 112% of its EBIT. The bottom line is that we do not find Ubiquoss's debt levels at all concerning. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Ubiquoss's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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