United Nova TechnologyLtd (SHSE:688469) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that United Nova Technology Co.,Ltd. (SHSE:688469) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for United Nova TechnologyLtd

What Is United Nova TechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 United Nova TechnologyLtd had debt of CN¥14.0b, up from CN¥12.1b in one year. However, because it has a cash reserve of CN¥8.05b, its net debt is less, at about CN¥5.95b.

How Healthy Is United Nova TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, United Nova TechnologyLtd had liabilities of CN¥8.05b due within 12 months, and liabilities of CN¥11.3b due beyond 12 months. Offsetting these obligations, it had cash of CN¥8.05b as well as receivables valued at CN¥1.02b due within 12 months. So it has liabilities totalling CN¥10.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since United Nova TechnologyLtd has a market capitalization of CN¥33.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year United Nova TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥5.7b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, United Nova TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥3.0b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥3.9b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for United Nova TechnologyLtd that you should be aware of before investing here.

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.