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 about.’ 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. We note that Ultima United Limited (ASX:UUL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
View our latest analysis for Ultima United
What Is Ultima United’s Net Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Ultima United had debt of AU$2.69m, up from AU$2.40m in one year. But on the other hand it also has AU$13.0m in cash, leading to a AU$10.3m net cash position.
A Look At Ultima United’s Liabilities
According to the last reported balance sheet, Ultima United had liabilities of AU$3.20m due within 12 months, and liabilities of AU$703.8k due beyond 12 months. Offsetting this, it had AU$13.0m in cash and AU$44.0k in receivables that were due within 12 months. So it actually has AU$9.12m more liquid assets than total liabilities.
This excess liquidity is a great indication that Ultima United’s balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Ultima United 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 it is Ultima United’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given it has no significant operating revenue at the moment, shareholders will be hoping Ultima United can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is Ultima United?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Ultima United had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$99k and booked a AU$117k accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of AU$10.3m. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analyzing debt. However, not all investment risk resides within the balance sheet – far from it. For example, we’ve discovered 4 warning signs for Ultima United (3 make us uncomfortable!) that you should be aware of before investing here.
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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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.