The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, UCloud Technology Co., Ltd. (SHSE:688158) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is UCloud Technology's Debt?

As you can see below, UCloud Technology had CN¥103.0m of debt at June 2024, down from CN¥154.8m a year prior. However, its balance sheet shows it holds CN¥995.8m in cash, so it actually has CN¥892.8m net cash.

How Strong Is UCloud Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that UCloud Technology had liabilities of CN¥940.4m due within 12 months and liabilities of CN¥78.2m due beyond that. On the other hand, it had cash of CN¥995.8m and CN¥588.0m worth of receivables due within a year. So it can boast CN¥565.3m more liquid assets than total liabilities.

This short term liquidity is a sign that UCloud Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that UCloud Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if UCloud Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, UCloud Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.5b, which is a fall of 9.6%. We would much prefer see growth.

So How Risky Is UCloud Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that UCloud Technology 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 CN¥468m and booked a CN¥263m accounting loss. However, it has net cash of CN¥892.8m, so it has a bit of time before it will need more capital. 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 analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that UCloud Technology 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.

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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.