Is uCloudlink Group (NASDAQ:UCL) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies uCloudlink Group Inc. (NASDAQ:UCL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 March 2024 uCloudlink Group had US$5.47m of debt, an increase on US$3.11m, over one year. But it also has US$31.9m in cash to offset that, meaning it has US$26.4m net cash.

How Strong Is uCloudlink Group's Balance Sheet?

The latest balance sheet data shows that uCloudlink Group had liabilities of US$37.7m due within a year, and liabilities of US$1.15m falling due after that. On the other hand, it had cash of US$31.9m and US$7.52m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to uCloudlink Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$58.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. 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 28% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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. 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. Over the last two years, 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 it is always sensible to investigate a company's debt, in this case uCloudlink Group has US$26.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$4.7m, being 147% of its EBIT. So we don't have any problem with uCloudlink Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for uCloudlink Group you should be aware of.

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.