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.' 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 note that uCloudlink Group Inc. (NASDAQ:UCL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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$6.01m of debt in September 2022, down from US$6.31m, one year before. But it also has US$25.8m in cash to offset that, meaning it has US$19.8m net cash.

How Healthy Is uCloudlink Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that uCloudlink Group had liabilities of US$40.9m due within 12 months and liabilities of US$219.0k due beyond that. Offsetting these obligations, it had cash of US$25.8m as well as receivables valued at US$12.6m due within 12 months. So its liabilities total US$2.71m more than the combination of its cash and short-term receivables.

This state of affairs indicates that uCloudlink Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$151.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, uCloudlink Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, uCloudlink Group made a loss at the EBIT level, and saw its revenue drop to US$69m, which is a fall of 5.3%. That's not what we would hope to see.

So How Risky Is uCloudlink Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year uCloudlink Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$4.8m and booked a US$34m accounting loss. Given it only has net cash of US$19.8m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for uCloudlink Group (1 is a bit concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.