Is U-MEDIA Communications (GTSM:6470) A Risky Investment?

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.' 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 note that U-MEDIA Communications, Inc. (GTSM:6470) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for U-MEDIA Communications

What Is U-MEDIA Communications's Net Debt?

As you can see below, at the end of September 2020, U-MEDIA Communications had NT$248.2m of debt, up from NT$153.4m a year ago. Click the image for more detail. But it also has NT$671.9m in cash to offset that, meaning it has NT$423.7m net cash.

A Look At U-MEDIA Communications's Liabilities

We can see from the most recent balance sheet that U-MEDIA Communications had liabilities of NT$978.2m falling due within a year, and liabilities of NT$62.2m due beyond that. On the other hand, it had cash of NT$671.9m and NT$729.6m worth of receivables due within a year. So it can boast NT$361.0m more liquid assets than total liabilities.

It's good to see that U-MEDIA Communications has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, U-MEDIA Communications boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that U-MEDIA Communications grew its EBIT by 104% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if U-MEDIA Communications can strengthen its balance sheet over time. 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 U-MEDIA Communications 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. Happily for any shareholders, U-MEDIA Communications actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case U-MEDIA Communications has NT$423.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$385m, being 109% of its EBIT. When it comes to U-MEDIA Communications's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. To that end, you should be aware of the 3 warning signs we've spotted with U-MEDIA Communications .

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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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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