Stock Analysis

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

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NasdaqGS:UEIC
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Universal Electronics Inc. (NASDAQ:UEIC) does carry debt. But is this debt a concern to shareholders?

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. 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. 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.

See our latest analysis for Universal Electronics

What Is Universal Electronics's Debt?

As you can see below, at the end of March 2022, Universal Electronics had US$85.0m of debt, up from US$40.0m a year ago. Click the image for more detail. However, it also had US$62.2m in cash, and so its net debt is US$22.8m.

debt-equity-history-analysis
NasdaqGS:UEIC Debt to Equity History July 21st 2022

How Healthy Is Universal Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Universal Electronics had liabilities of US$235.6m due within 12 months and liabilities of US$19.2m due beyond that. Offsetting this, it had US$62.2m in cash and US$141.5m in receivables that were due within 12 months. So its liabilities total US$51.1m more than the combination of its cash and short-term receivables.

Of course, Universal Electronics has a market capitalization of US$345.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Universal Electronics's net debt is only 0.52 times its EBITDA. And its EBIT covers its interest expense a whopping 22.7 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In fact Universal Electronics's saving grace is its low debt levels, because its EBIT has tanked 54% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Universal Electronics actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Happily, Universal Electronics's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its EBIT growth rate has the opposite effect. All these things considered, it appears that Universal Electronics can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. We'd be motivated to research the stock further if we found out that Universal Electronics insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Valuation is complex, but we're helping make it simple.

Find out whether Universal Electronics is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:UEIC

Universal Electronics

Universal Electronics Inc. designs, develops, manufactures, and sells pre-programmed and universal control products, audio-video (AV) accessories, and intelligent wireless security and smart home products for video services, consumer electronics, security, home automation, climate control, and home appliance markets.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth3
Past Performance1
Financial Health5
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet and good value.