UC&GN International (GTSM:3603) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 UC&GN International Corp. (GTSM:3603) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for UC&GN International

What Is UC&GN International's Net Debt?

The chart below, which you can click on for greater detail, shows that UC&GN International had NT$48.0m in debt in June 2020; about the same as the year before. However, it does have NT$35.8m in cash offsetting this, leading to net debt of about NT$12.2m.

How Strong Is UC&GN International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that UC&GN International had liabilities of NT$79.9m due within 12 months and liabilities of NT$52.0m due beyond that. On the other hand, it had cash of NT$35.8m and NT$40.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$55.9m.

While this might seem like a lot, it is not so bad since UC&GN International has a market capitalization of NT$138.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without 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 UC&GN International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year UC&GN International wasn't profitable at an EBIT level, but managed to grow its revenue by 7.3%, to NT$185m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months UC&GN International produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at NT$818k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of NT$6.6m and a profit of NT$11m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with UC&GN International (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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