Is uCloudlink Group (NASDAQ:UCL) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, uCloudlink Group Inc. (NASDAQ:UCL) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for uCloudlink Group

What Is uCloudlink Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that uCloudlink Group had US$3.70m of debt in December 2020, down from US$6.66m, one year before. However, its balance sheet shows it holds US$41.4m in cash, so it actually has US$37.7m net cash.

How Healthy Is uCloudlink Group's Balance Sheet?

According to the last reported balance sheet, uCloudlink Group had liabilities of US$40.5m due within 12 months, and liabilities of US$321.0k due beyond 12 months. Offsetting this, it had US$41.4m in cash and US$9.01m in receivables that were due within 12 months. So it can boast US$9.52m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since uCloudlink Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year uCloudlink Group had a loss before interest and tax, and actually shrunk its revenue by 43%, to US$90m. To be frank that doesn't bode well.

So How Risky Is uCloudlink Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months uCloudlink Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$2.0m of cash and made a loss of US$65m. Given it only has net cash of US$37.7m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should learn about the 2 warning signs we've spotted with uCloudlink Group (including 1 which is significant) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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