Unigroup Guoxin Microelectronics (SZSE:002049) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies Unigroup Guoxin Microelectronics Co., Ltd. (SZSE:002049) makes use of debt. But the more important question is: how much risk is that debt creating?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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. 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.

What Is Unigroup Guoxin Microelectronics's Debt?

As you can see below, Unigroup Guoxin Microelectronics had CN¥1.62b of debt at September 2024, down from CN¥1.84b a year prior. However, its balance sheet shows it holds CN¥4.19b in cash, so it actually has CN¥2.57b net cash.

A Look At Unigroup Guoxin Microelectronics' Liabilities

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. Offsetting these obligations, it had cash of CN¥4.19b as well as receivables valued at CN¥5.70b due within 12 months. So it actually has CN¥5.43b more liquid assets than total liabilities.

This surplus suggests that Unigroup Guoxin Microelectronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Unigroup Guoxin Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Unigroup Guoxin Microelectronics

It is just as well that Unigroup Guoxin Microelectronics's load is not too heavy, because its EBIT was down 48% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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¥2.57b, as well as more liquid assets than liabilities. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Unigroup Guoxin Microelectronics is showing 2 warning signs in our investment analysis , you should know about...

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.