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. Importantly, Universal Microwave Technology, Inc. (GTSM:3491) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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 Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Universal Microwave Technology had debt of NT$405.0m, up from NT$120.0m in one year. But on the other hand it also has NT$1.15b in cash, leading to a NT$748.2m net cash position.

How Strong Is Universal Microwave Technology's Balance Sheet?

The latest balance sheet data shows that Universal Microwave Technology had liabilities of NT$834.2m due within a year, and liabilities of NT$46.8m falling due after that. Offsetting this, it had NT$1.15b in cash and NT$483.8m in receivables that were due within 12 months. So it actually has NT$755.9m more liquid assets than total liabilities.

This surplus suggests that Universal Microwave Technology is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Universal Microwave Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Universal Microwave Technology's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Universal Microwave 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. In the last three years, Universal Microwave Technology's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Universal Microwave Technology has NT$748.2m in net cash and a decent-looking balance sheet. So we don't have any problem with Universal Microwave Technology's use of debt. 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. For example, we've discovered 4 warning signs for Universal Microwave Technology (1 is a bit concerning!) 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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