These 4 Measures Indicate That Unigroup Guoxin Microelectronics (SZSE:002049) Is Using Debt Reasonably Well

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Unigroup Guoxin Microelectronics Co., Ltd. (SZSE:002049) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Unigroup Guoxin Microelectronics

How Much Debt Does Unigroup Guoxin Microelectronics Carry?

As you can see below, at the end of March 2024, Unigroup Guoxin Microelectronics had CN¥1.98b of debt, up from CN¥1.90b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.62b in cash, so it actually has CN¥1.64b net cash.

How Strong Is Unigroup Guoxin Microelectronics' Balance Sheet?

We can see from the most recent balance sheet that Unigroup Guoxin Microelectronics had liabilities of CN¥3.16b falling due within a year, and liabilities of CN¥1.75b due beyond that. On the other hand, it had cash of CN¥3.62b and CN¥6.06b worth of receivables due within a year. So it actually has CN¥4.77b more liquid assets than total liabilities.

This short term liquidity is a sign that Unigroup Guoxin Microelectronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Unigroup Guoxin Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Unigroup Guoxin Microelectronics's load is not too heavy, because its EBIT was down 21% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Unigroup Guoxin Microelectronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Unigroup Guoxin Microelectronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Unigroup Guoxin Microelectronics produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Unigroup Guoxin Microelectronics has net cash of CN¥1.64b, as well as more liquid assets than liabilities. So we don't have any problem with Unigroup Guoxin Microelectronics's use of debt. 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 instance, we've identified 1 warning sign for Unigroup Guoxin Microelectronics that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com