Is uCloudlink Group (NASDAQ:UCL) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that uCloudlink Group Inc. (NASDAQ:UCL) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for uCloudlink Group

What Is uCloudlink Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 uCloudlink Group had US$4.64m of debt, an increase on US$2.63m, over one year. But it also has US$33.9m in cash to offset that, meaning it has US$29.3m net cash.

How Strong Is uCloudlink Group's Balance Sheet?

The latest balance sheet data shows that uCloudlink Group had liabilities of US$37.0m due within a year, and liabilities of US$867.0k falling due after that. Offsetting these obligations, it had cash of US$33.9m as well as receivables valued at US$7.18m due within 12 months. So it actually has US$3.26m more liquid assets than total liabilities.

This surplus suggests that uCloudlink Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, uCloudlink Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact uCloudlink Group's saving grace is its low debt levels, because its EBIT has tanked 31% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 uCloudlink Group 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. While uCloudlink Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, uCloudlink Group generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case uCloudlink Group has US$29.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in US$6.0m. So we are not troubled with uCloudlink Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for uCloudlink Group that you should be aware of before investing here.

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.