These 4 Measures Indicate That UVAT Technology (GTSM:3580) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies UVAT Technology Co., Ltd. (GTSM:3580) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for UVAT Technology

What Is UVAT Technology's Debt?

As you can see below, at the end of December 2020, UVAT Technology had NT$196.3m of debt, up from NT$40.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$337.4m in cash, so it actually has NT$141.1m net cash.

A Look At UVAT Technology's Liabilities

The latest balance sheet data shows that UVAT Technology had liabilities of NT$450.9m due within a year, and liabilities of NT$6.31m falling due after that. On the other hand, it had cash of NT$337.4m and NT$322.5m worth of receivables due within a year. So it actually has NT$202.7m more liquid assets than total liabilities.

This short term liquidity is a sign that UVAT Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, UVAT Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for UVAT Technology if management cannot prevent a repeat of the 53% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine UVAT Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While UVAT Technology 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. During the last three years, UVAT Technology generated free cash flow amounting to a very robust 95% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case UVAT Technology has NT$141.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in NT$72m. So we are not troubled with UVAT Technology's debt use. 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. We've identified 1 warning sign with UVAT Technology , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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