Does Universal Electronics (NASDAQ:UEIC) Have A Healthy Balance Sheet?

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. As with many other companies Universal Electronics Inc. (NASDAQ:UEIC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Universal Electronics

What Is Universal Electronics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Universal Electronics had debt of US$53.0m, up from US$50.0m in one year. But it also has US$58.8m in cash to offset that, meaning it has US$5.83m net cash.

How Strong Is Universal Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Universal Electronics had liabilities of US$204.8m due within 12 months and liabilities of US$13.5m due beyond that. Offsetting this, it had US$58.8m in cash and US$151.9m in receivables that were due within 12 months. So it has liabilities totalling US$7.52m more than its cash and near-term receivables, combined.

Having regard to Universal Electronics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$506.8m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Universal Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Universal Electronics has increased its EBIT by 6.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Universal Electronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Universal Electronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Universal Electronics 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

We could understand if investors are concerned about Universal Electronics's liabilities, but we can be reassured by the fact it has has net cash of US$5.83m. And it impressed us with free cash flow of US$33m, being 155% of its EBIT. So we don't think Universal Electronics's use of debt is risky. 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 - Universal Electronics has 2 warning signs we think you should be aware of.

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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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