These 4 Measures Indicate That Universal Microwave Technology (GTSM:3491) 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 Universal Microwave Technology, Inc. (GTSM:3491) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Universal Microwave Technology

What Is Universal Microwave Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Universal Microwave Technology had NT$425.0m of debt, an increase on NT$242.4m, over one year. However, it does have NT$1.03b in cash offsetting this, leading to net cash of NT$603.0m.

How Healthy Is Universal Microwave Technology's Balance Sheet?

According to the last reported balance sheet, Universal Microwave Technology had liabilities of NT$805.3m due within 12 months, and liabilities of NT$33.6m due beyond 12 months. Offsetting this, it had NT$1.03b in cash and NT$454.3m in receivables that were due within 12 months. So it actually has NT$643.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Universal Microwave Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Universal Microwave 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 Universal Microwave Technology if management cannot prevent a repeat of the 46% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Universal Microwave 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 company can only pay off debt with cold hard cash, not accounting profits. Universal Microwave 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. In the last three years, Universal Microwave Technology's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Universal Microwave Technology has net cash of NT$603.0m, as well as more liquid assets than liabilities. So we are not troubled with Universal Microwave Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Universal Microwave Technology that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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