These 4 metrics indicate that Universal Electronics (NASDAQ:UEIC) is using debt reasonably well
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. 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 can see that Universal Electronics Inc. (NASDAQ: UEIC) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies 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.
Our analysis indicates that The UEIC is potentially overvalued!
How much debt does Universal Electronics have?
You can click on the graph below for historical numbers, but it shows that in June 2022, Universal Electronics had $88.0 million in debt, up from $46.0 million, on a year. However, since he has a cash reserve of $54.0 million, his net debt is lower, at around $34.0 million.
A look at Universal Electronics’ responsibilities
The latest balance sheet data shows Universal Electronics had liabilities of $233.4 million due within the year, and liabilities of $17.6 million due thereafter. In compensation for these obligations, it had cash of US$54.0 million as well as receivables valued at US$140.4 million and maturing within 12 months. Thus, its liabilities total $56.7 million more than the combination of its cash and short-term receivables.
This shortfall isn’t that bad because Universal Electronics is worth $245.7 million and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But we definitely want to keep our eyes peeled for indications that its debt is too risky.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Universal Electronics has a low net debt to EBITDA ratio of just 0.86. And its EBIT covers its interest charges 17.2 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. In fact, Universal Electronics’ saving grace is its low level of debt, as its EBIT has fallen 66% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Universal Electronics can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Universal Electronics has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
Universal Electronics’ EBIT growth rate was definitely negative in this analysis, even though the other factors we considered were significantly better. There is no doubt that its ability to cover its interest costs with its EBIT is quite flashy. Given this range of data points, we believe Universal Electronics is in a good position to manage its level of leverage. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. We would be motivated to do more research on the stock if we find that Universal Electronics insiders have recently bought shares. If you’re in luck too, because today we’re sharing our list of reported insider trades for free.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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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