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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Ulferts International Limited (HKG:1711) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Ulferts International's Debt?
As you can see below, Ulferts International had HK$4.00m of debt at March 2019, down from HK$19.8m a year prior. But on the other hand it also has HK$59.5m in cash, leading to a HK$55.5m net cash position.
A Look At Ulferts International's Liabilities
We can see from the most recent balance sheet that Ulferts International had liabilities of HK$56.0m falling due within a year, and liabilities of HK$6.83m due beyond that. Offsetting these obligations, it had cash of HK$59.5m as well as receivables valued at HK$11.5m due within 12 months. So it actually has HK$8.07m more liquid assets than total liabilities.
This short term liquidity is a sign that Ulferts International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ulferts International boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ulferts International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Ulferts International actually shrunk its revenue by 6.0%, to HK$243m. That's not what we would hope to see.
So How Risky Is Ulferts International?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ulferts International had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through HK$7.9m of cash and made a loss of HK$4.0m. Given it only has net cash of HK$59m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Ulferts International's profit, revenue, and operating cashflow have changed over the last few years.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.