We Think uCloudlink Group (NASDAQ:UCL) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies uCloudlink Group Inc. (NASDAQ:UCL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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

How Much Debt Does uCloudlink Group Carry?

As you can see below, uCloudlink Group had US$2.40m of debt at September 2023, down from US$6.01m a year prior. However, its balance sheet shows it holds US$27.2m in cash, so it actually has US$24.8m net cash.

How Healthy Is uCloudlink Group's Balance Sheet?

The latest balance sheet data shows that uCloudlink Group had liabilities of US$37.1m due within a year, and liabilities of US$1.21m falling due after that. Offsetting this, it had US$27.2m in cash and US$9.83m in receivables that were due within 12 months. So it has liabilities totalling US$1.27m more than its cash and near-term receivables, combined.

Of course, uCloudlink Group has a market capitalization of US$48.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, uCloudlink Group boasts net cash, so it's fair to say it does not have a heavy debt load!

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$19m. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 most recent year, uCloudlink Group recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that uCloudlink Group has US$24.8m in net cash. And it impressed us with free cash flow of US$13m, being 68% of its EBIT. So is uCloudlink Group's debt a risk? It doesn't seem so to us. 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. Be aware that uCloudlink Group is showing 3 warning signs in our investment analysis , you should know about...

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.