Universal Vision Biotechnology (GTSM:3218) Seems To Use Debt Rather Sparingly

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.' 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, Universal Vision Biotechnology Co., Ltd. (GTSM:3218) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Universal Vision Biotechnology

What Is Universal Vision Biotechnology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Universal Vision Biotechnology had NT$328.6m of debt, an increase on NT$83.8m, over one year. But it also has NT$1.08b in cash to offset that, meaning it has NT$752.8m net cash.

A Look At Universal Vision Biotechnology's Liabilities

The latest balance sheet data shows that Universal Vision Biotechnology had liabilities of NT$846.6m due within a year, and liabilities of NT$373.8m falling due after that. Offsetting this, it had NT$1.08b in cash and NT$427.4m in receivables that were due within 12 months. So it can boast NT$288.4m more liquid assets than total liabilities.

This state of affairs indicates that Universal Vision Biotechnology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the NT$18.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Universal Vision Biotechnology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Universal Vision Biotechnology grew its EBIT by 123% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Universal Vision Biotechnology'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. Universal Vision Biotechnology 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. During the last three years, Universal Vision Biotechnology produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Universal Vision Biotechnology has net cash of NT$752.8m, as well as more liquid assets than liabilities. And we liked the look of last year's 123% year-on-year EBIT growth. So we don't think Universal Vision Biotechnology's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Universal Vision Biotechnology, you may well want to click here to check an interactive graph of its earnings per share history.

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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