- Oops!Something went wrong.Please try again later.
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.' 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, Universal Electronics Inc. (NASDAQ:UEIC) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Universal Electronics's Debt?
As you can see below, Universal Electronics had US$50.0m of debt at September 2020, down from US$88.0m a year prior. But on the other hand it also has US$67.1m in cash, leading to a US$17.1m net cash position.
A Look At Universal Electronics' Liabilities
The latest balance sheet data shows that Universal Electronics had liabilities of US$194.1m due within a year, and liabilities of US$17.9m falling due after that. Offsetting these obligations, it had cash of US$67.1m as well as receivables valued at US$141.2m due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to Universal Electronics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$758.3m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Universal Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Universal Electronics grew its EBIT by 215% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Universal Electronics's ability to maintain a healthy balance sheet going forward. 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. Universal Electronics 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. Happily for any shareholders, Universal Electronics actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Universal Electronics has US$17.1m in net cash. The cherry on top was that in converted 214% of that EBIT to free cash flow, bringing in US$66m. So is Universal Electronics's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Universal Electronics 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.
This article by Simply Wall St is general in nature. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.