Is United Renewable Energy (TPE:3576) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that United Renewable Energy Co., Ltd. (TPE:3576) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for United Renewable Energy

What Is United Renewable Energy's Debt?

As you can see below, United Renewable Energy had NT$15.2b of debt at September 2020, down from NT$24.6b a year prior. On the flip side, it has NT$5.79b in cash leading to net debt of about NT$9.41b.

A Look At United Renewable Energy's Liabilities

The latest balance sheet data shows that United Renewable Energy had liabilities of NT$11.5b due within a year, and liabilities of NT$8.01b falling due after that. On the other hand, it had cash of NT$5.79b and NT$6.30b worth of receivables due within a year. So its liabilities total NT$7.46b more than the combination of its cash and short-term receivables.

Given United Renewable Energy has a market capitalization of NT$38.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is United Renewable Energy's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, United Renewable Energy made a loss at the EBIT level, and saw its revenue drop to NT$14b, which is a fall of 29%. To be frank that doesn't bode well.

Caveat Emptor

Not only did United Renewable Energy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost NT$2.5b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of NT$4.2b into a profit. So in short it's a really risky stock. 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. Take risks, for example - United Renewable Energy has 1 warning sign we think you should be aware of.

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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