Here's Why Universal Electronics (NASDAQ:UEIC) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Universal Electronics Inc. (NASDAQ:UEIC) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Universal Electronics

What Is Universal Electronics's Debt?

The image below, which you can click on for greater detail, shows that Universal Electronics had debt of US$41.0m at the end of June 2024, a reduction from US$75.0m over a year. On the flip side, it has US$23.1m in cash leading to net debt of about US$17.9m.

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$141.0m due within 12 months and liabilities of US$13.3m due beyond that. Offsetting this, it had US$23.1m in cash and US$104.4m in receivables that were due within 12 months. So it has liabilities totalling US$26.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Universal Electronics is worth US$110.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Universal Electronics had a loss before interest and tax, and actually shrunk its revenue by 21%, to US$387m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Universal Electronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$13m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$43m. So we do think this stock is quite risky. For riskier companies like Universal Electronics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.