These 4 Measures Indicate That UMS Holdings (SGX:558) Is Using Debt Safely

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.' 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. As with many other companies UMS Holdings Limited (SGX:558) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for UMS Holdings

What Is UMS Holdings's Debt?

As you can see below, at the end of September 2021, UMS Holdings had S$28.4m of debt, up from S$18.6m a year ago. Click the image for more detail. However, it does have S$53.7m in cash offsetting this, leading to net cash of S$25.4m.

How Strong Is UMS Holdings' Balance Sheet?

According to the last reported balance sheet, UMS Holdings had liabilities of S$58.0m due within 12 months, and liabilities of S$44.1m due beyond 12 months. Offsetting these obligations, it had cash of S$53.7m as well as receivables valued at S$53.7m due within 12 months. So it can boast S$5.30m more liquid assets than total liabilities.

Having regard to UMS Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the S$880.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that UMS Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, UMS Holdings grew its EBIT by 38% 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 future earnings, more than anything, that will determine UMS Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. UMS Holdings 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 last three years, UMS Holdings recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that UMS Holdings has net cash of S$25.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of S$52m, being 99% of its EBIT. So is UMS Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with UMS Holdings .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.