Would United Nova TechnologyLtd (SHSE:688469) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for United Nova TechnologyLtd

What Is United Nova TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 United Nova TechnologyLtd had debt of CN¥12.2b, up from CN¥9.98b in one year. On the flip side, it has CN¥4.75b in cash leading to net debt of about CN¥7.49b.

How Healthy Is United Nova TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, United Nova TechnologyLtd had liabilities of CN¥8.11b due within 12 months, and liabilities of CN¥8.09b due beyond 12 months. On the other hand, it had cash of CN¥4.75b and CN¥1.22b worth of receivables due within a year. So its liabilities total CN¥10.2b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since United Nova TechnologyLtd has a market capitalization of CN¥32.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine United Nova TechnologyLtd's ability to maintain a healthy balance sheet going forward. 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 14%, to CN¥6.0b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, United Nova TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥2.7b 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¥2.8b in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for United Nova TechnologyLtd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.