Here's Why Uni-Trend Technology (China) (SHSE:688628) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Uni-Trend Technology (China) Co., Ltd. (SHSE:688628) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Uni-Trend Technology (China)

What Is Uni-Trend Technology (China)'s Net Debt?

As you can see below, at the end of June 2024, Uni-Trend Technology (China) had CN¥80.5m of debt, up from CN¥24.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥330.0m in cash, so it actually has CN¥249.4m net cash.

How Strong Is Uni-Trend Technology (China)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Uni-Trend Technology (China) had liabilities of CN¥253.5m due within 12 months and liabilities of CN¥60.2m due beyond that. Offsetting these obligations, it had cash of CN¥330.0m as well as receivables valued at CN¥139.0m due within 12 months. So it can boast CN¥155.3m more liquid assets than total liabilities.

This surplus suggests that Uni-Trend Technology (China) has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Uni-Trend Technology (China) boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Uni-Trend Technology (China) grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Uni-Trend Technology (China)'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. While Uni-Trend Technology (China) 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. Looking at the most recent three years, Uni-Trend Technology (China) recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Uni-Trend Technology (China) has net cash of CN¥249.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't think Uni-Trend Technology (China)'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Uni-Trend Technology (China) (1 is a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.