Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Ucar SA (EPA:ALUCR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Ucar
What Is Ucar's Debt?
As you can see below, at the end of December 2018, Ucar had €13.7m of debt, up from €5.71m a year ago. Click the image for more detail. However, its balance sheet shows it holds €15.3m in cash, so it actually has €1.55m net cash.
A Look At Ucar's Liabilities
The latest balance sheet data shows that Ucar had liabilities of €27.2m due within a year, and liabilities of €3.09m falling due after that. Offsetting this, it had €15.3m in cash and €17.4m in receivables that were due within 12 months. So it can boast €2.49m more liquid assets than total liabilities.
This surplus suggests that Ucar has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ucar has more cash than debt is arguably a good indication that it can manage its debt safely.
Fortunately, Ucar grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ucar's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ucar 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, Ucar saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.