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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Unigroup Guoxin Microelectronics Co., Ltd. (SZSE:002049) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Unigroup Guoxin Microelectronics

What Is Unigroup Guoxin Microelectronics's Debt?

As you can see below, Unigroup Guoxin Microelectronics had CN¥1.60b of debt at September 2024, down from CN¥1.87b a year prior. However, its balance sheet shows it holds CN¥4.19b in cash, so it actually has CN¥2.59b net cash.

How Healthy Is Unigroup Guoxin Microelectronics' Balance Sheet?

We can see from the most recent balance sheet that Unigroup Guoxin Microelectronics had liabilities of CN¥2.63b falling due within a year, and liabilities of CN¥1.84b due beyond that. On the other hand, it had cash of CN¥4.19b and CN¥5.70b worth of receivables due within a year. So it can boast CN¥5.43b 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. Simply put, the fact that Unigroup Guoxin Microelectronics has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Unigroup Guoxin Microelectronics if management cannot prevent a repeat of the 46% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Unigroup Guoxin Microelectronics 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Unigroup Guoxin Microelectronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Unigroup Guoxin Microelectronics recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Unigroup Guoxin Microelectronics has CN¥2.59b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in CN¥1.3b. So we don't have any problem with Unigroup Guoxin Microelectronics's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Unigroup Guoxin Microelectronics , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.