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Is Universal Electronics (NASDAQ:UEIC) Using Too Much Debt?

·4 min read

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. We can see that Universal Electronics Inc. (NASDAQ:UEIC) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Universal Electronics

How Much Debt Does Universal Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Universal Electronics had US$53.0m of debt, an increase on US$50.0m, over one year. However, it does have US$58.8m in cash offsetting this, leading to net cash of US$5.83m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Universal Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Universal Electronics had liabilities of US$204.8m due within 12 months and liabilities of US$13.5m due beyond that. Offsetting this, it had US$58.8m in cash and US$151.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$7.52m.

Having regard to Universal Electronics' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$486.6m company is struggling for cash, we still think it's worth monitoring its 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.

The good news is that Universal Electronics has increased its EBIT by 6.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Universal Electronics 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. 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. Over the last three years, Universal Electronics actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Universal Electronics has US$5.83m in net cash. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in US$33m. So we don't think Universal Electronics's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Universal Electronics is showing 1 warning sign 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.