Uniti Wireless (ASX:UWL) Has Debt But No Earnings; Should You Worry?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Uniti Wireless Limited (ASX:UWL) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Uniti Wireless
What Is Uniti Wireless's Net Debt?
As you can see below, Uniti Wireless had AU$362.0k of debt at June 2019, down from AU$9.27m a year prior. However, its balance sheet shows it holds AU$19.7m in cash, so it actually has AU$19.4m net cash.
How Healthy Is Uniti Wireless's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Uniti Wireless had liabilities of AU$13.9m due within 12 months and liabilities of AU$11.6m due beyond that. Offsetting this, it had AU$19.7m in cash and AU$2.33m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$3.38m.
This state of affairs indicates that Uniti Wireless's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$260.4m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Uniti Wireless 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 ultimately the future profitability of the business will decide if Uniti Wireless can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Uniti Wireless managed to grow its revenue by 250%, to AU$14m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Uniti Wireless?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Uniti Wireless had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of AU$1.7m and booked a AU$14m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of AU$20m. That kitty means the company can keep spending for growth for at least three years, at current rates. Importantly, Uniti Wireless's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like Uniti Wireless I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
