We Think UVAT Technology (GTSM:3580) Can Stay On Top Of Its Debt

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. We can see that UVAT Technology Co., Ltd. (GTSM:3580) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 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 UVAT Technology

What Is UVAT Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 UVAT Technology had NT$183.0m of debt, an increase on NT$10.5m, over one year. But on the other hand it also has NT$333.9m in cash, leading to a NT$150.9m net cash position.

How Healthy Is UVAT Technology's Balance Sheet?

According to the last reported balance sheet, UVAT Technology had liabilities of NT$449.8m due within 12 months, and liabilities of NT$1.58m due beyond 12 months. Offsetting this, it had NT$333.9m in cash and NT$295.1m in receivables that were due within 12 months. So it actually has NT$177.6m 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. Simply put, the fact that UVAT Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, UVAT Technology saw its EBIT drop by 6.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. UVAT Technology 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, UVAT Technology produced sturdy free cash flow equating to 75% 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 it is always sensible to investigate a company's debt, in this case UVAT Technology has NT$150.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in NT$90m. So is UVAT Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that UVAT Technology is showing 3 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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