We Think U-MEDIA Communications (GTSM:6470) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, U-MEDIA Communications, Inc. (GTSM:6470) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for U-MEDIA Communications

What Is U-MEDIA Communications's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 U-MEDIA Communications had NT$294.0m of debt, an increase on NT$227.9m, over one year. But it also has NT$854.1m in cash to offset that, meaning it has NT$560.1m net cash.

How Strong Is U-MEDIA Communications' Balance Sheet?

We can see from the most recent balance sheet that U-MEDIA Communications had liabilities of NT$919.6m falling due within a year, and liabilities of NT$54.8m due beyond that. Offsetting these obligations, it had cash of NT$854.1m as well as receivables valued at NT$664.6m due within 12 months. So it actually has NT$544.3m more liquid assets than total liabilities.

This surplus suggests that U-MEDIA Communications is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that U-MEDIA Communications has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that U-MEDIA Communications has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. 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. Over the last three years, U-MEDIA Communications actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that U-MEDIA Communications has net cash of NT$560.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$371m, being 101% of its EBIT. The bottom line is that we do not find U-MEDIA Communications's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that U-MEDIA Communications is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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