Does uCloudlink Group (NASDAQ:UCL) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, uCloudlink Group Inc. (NASDAQ:UCL) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for uCloudlink Group

What Is uCloudlink Group's Debt?

The image below, which you can click on for greater detail, shows that uCloudlink Group had debt of US$2.63m at the end of June 2023, a reduction from US$9.75m over a year. However, it does have US$30.2m in cash offsetting this, leading to net cash of US$27.6m.

How Healthy Is uCloudlink Group's Balance Sheet?

We can see from the most recent balance sheet that uCloudlink Group had liabilities of US$35.9m falling due within a year, and liabilities of US$1.25m due beyond that. On the other hand, it had cash of US$30.2m and US$8.57m worth of receivables due within a year. So it can boast US$1.61m more liquid assets than total liabilities.

This short term liquidity is a sign that uCloudlink Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that uCloudlink Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, uCloudlink Group turned things around in the last 12 months, delivering and EBIT of US$11m. 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 uCloudlink Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. uCloudlink Group 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. Over the last year, uCloudlink Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that uCloudlink Group has net cash of US$27.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$11m, being 104% of its EBIT. So we don't think uCloudlink Group's use of debt is risky. 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. Case in point: We've spotted 4 warning signs for uCloudlink Group you should be aware of, and 1 of them is concerning.

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.

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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.