The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that United Fiber Optic Communication Inc. (GTSM:4903) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 United Fiber Optic Communication
How Much Debt Does United Fiber Optic Communication Carry?
As you can see below, at the end of September 2020, United Fiber Optic Communication had NT$90.0m of debt, up from NT$20.0m a year ago. Click the image for more detail. On the flip side, it has NT$36.7m in cash leading to net debt of about NT$53.3m.
A Look At United Fiber Optic Communication's Liabilities
We can see from the most recent balance sheet that United Fiber Optic Communication had liabilities of NT$479.3m falling due within a year, and liabilities of NT$72.1m due beyond that. Offsetting these obligations, it had cash of NT$36.7m as well as receivables valued at NT$639.6m due within 12 months. So it can boast NT$124.8m more liquid assets than total liabilities.
This excess liquidity suggests that United Fiber Optic Communication is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since United Fiber Optic Communication will need earnings to service that debt. 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 Fiber Optic Communication saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Importantly, United Fiber Optic Communication had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable NT$197m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. For example, we've discovered 3 warning signs for United Fiber Optic Communication (2 are a bit concerning!) that you should be aware of before investing here.
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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About TPEX:4903
United Fiber Optic Communication
Engages in the manufacture and sale of fiber-optic cables and transmission equipment in Taiwan, the United States, Japan, and internationally.
Flawless balance sheet with questionable track record.