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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that uCloudlink Group Inc. (NASDAQ:UCL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is uCloudlink Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 uCloudlink Group had US$4.78m of debt, an increase on US$4.22m, over one year. However, its balance sheet shows it holds US$33.5m in cash, so it actually has US$28.7m net cash.
A Look At uCloudlink Group's Liabilities
Zooming in on the latest balance sheet data, we can see that uCloudlink Group had liabilities of US$44.7m due within 12 months and liabilities of US$292.0k due beyond that. Offsetting this, it had US$33.5m in cash and US$13.0m in receivables that were due within 12 months. So it actually has US$1.44m more liquid assets than total liabilities.
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$82.0m 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! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine uCloudlink Group'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.
Over 12 months, uCloudlink Group made a loss at the EBIT level, and saw its revenue drop to US$72m, which is a fall of 53%. To be frank that doesn't bode well.
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 the fact is that over the last twelve months uCloudlink Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$20m and booked a US$46m accounting loss. With only US$28.7m on the balance sheet, it would appear that its going to need to raise capital again 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. 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. For example, we've discovered 3 warning signs for uCloudlink Group that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
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