Does Uniform Industrial (TPE:2482) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Uniform Industrial Corporation (TPE:2482) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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.

View our latest analysis for Uniform Industrial

What Is Uniform Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Uniform Industrial had debt of NT$218.3m, up from NT$187.7m in one year. But on the other hand it also has NT$391.9m in cash, leading to a NT$173.7m net cash position.

A Look At Uniform Industrial's Liabilities

The latest balance sheet data shows that Uniform Industrial had liabilities of NT$344.7m due within a year, and liabilities of NT$119.9m falling due after that. On the other hand, it had cash of NT$391.9m and NT$60.8m worth of receivables due within a year. So its liabilities total NT$11.9m more than the combination of its cash and short-term receivables.

Having regard to Uniform Industrial's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the NT$648.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Uniform Industrial boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Uniform Industrial will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Uniform Industrial made a loss at the EBIT level, and saw its revenue drop to NT$876m, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Uniform Industrial?

While Uniform Industrial lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$50m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Uniform Industrial you should know about.

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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