Is UPC Technology (TWSE:1313) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, UPC Technology Corporation (TWSE:1313) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for UPC Technology

What Is UPC Technology's Net Debt?

As you can see below, at the end of March 2024, UPC Technology had NT$24.7b of debt, up from NT$21.2b a year ago. Click the image for more detail. However, because it has a cash reserve of NT$4.47b, its net debt is less, at about NT$20.2b.

How Healthy Is UPC Technology's Balance Sheet?

The latest balance sheet data shows that UPC Technology had liabilities of NT$12.5b due within a year, and liabilities of NT$17.9b falling due after that. On the other hand, it had cash of NT$4.47b and NT$5.92b worth of receivables due within a year. So its liabilities total NT$20.1b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of NT$14.9b, we think shareholders really should watch UPC Technology's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since UPC Technology will need earnings to service that debt. 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 UPC Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 8.0%, to NT$75b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months UPC Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost NT$1.2b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of NT$3.9b over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for UPC Technology that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com