Are Ultima United (ASX:UUL) using too much debt?

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Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that Ultima United Limited (ASX:UUL) has debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Ultima United

What is Ultima United’s net debt?

The image below, which you can click on for more details, shows Ultima United as of December 2021 were A$2.69m in debt, up from A$2.40m in one year. But on the other hand, he also has A$13.0 million in cash, resulting in a net cash position of A$10.3 million.

ASX: UUL Debt to Equity History June 25, 2022

A look at Ultima United’s responsibilities

According to the latest published balance sheet, Ultima United had liabilities of A$3.20 million due within 12 months and liabilities of A$703.8k due beyond 12 months. In return, he had A$13.0 million in cash and A$44.0k in receivables due within 12 months. So he actually has 9.12 million Australian dollars After liquid assets than total liabilities.

This excess cash is a great indication that Ultima United’s balance sheet is almost as strong as Fort Knox’s. From this perspective, lenders should feel as secure as the beloved of a black belt karate master. In short, Ultima United have clean cash, so it’s fair to say they don’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But it is Ultima United’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Given that it does not have significant operating income at the moment, shareholders are hoping Ultima United can move forward and gain traction for the business, before it runs out of cash.

So how risky is Ultima United?

Statistically speaking, businesses that lose money are riskier than those that make money. And we note that Ultima United has posted a loss in earnings before interest and taxes (EBIT) over the past year. And during the same period, it had a negative free cash outflow of A$99,000 and recorded a book loss of A$117,000. While this makes the business a bit risky, it’s important to remember that it has a net cash position of A$10.3 million. That means it could continue spending at its current rate for more than two years. Overall, its balance sheet doesn’t look too risky, at the moment, but we’re still cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we found 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 strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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