Is United Nova TechnologyLtd (SHSE:688469) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, United Nova Technology Co.,Ltd. (SHSE:688469) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for United Nova TechnologyLtd

What Is United Nova TechnologyLtd's Net Debt?

As you can see below, United Nova TechnologyLtd had CN¥12.6b of debt at March 2024, down from CN¥14.4b a year prior. However, it does have CN¥5.86b in cash offsetting this, leading to net debt of about CN¥6.78b.

How Strong Is United Nova TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that United Nova TechnologyLtd had liabilities of CN¥6.49b falling due within a year, and liabilities of CN¥12.3b due beyond that. Offsetting these obligations, it had cash of CN¥5.86b as well as receivables valued at CN¥746.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥12.2b.

United Nova TechnologyLtd has a market capitalization of CN¥27.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 United Nova TechnologyLtd 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.

In the last year United Nova TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to CN¥5.5b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months United Nova TechnologyLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥2.9b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥6.3b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that United Nova TechnologyLtd is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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