Would Unick (KOSDAQ:011320) Be Better Off With Less Debt?

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.' 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. We note that Unick Corporation (KOSDAQ:011320) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Unick

How Much Debt Does Unick Carry?

As you can see below, at the end of December 2020, Unick had ₩71.0b of debt, up from ₩66.5b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩31.8b, its net debt is less, at about ₩39.2b.

A Look At Unick's Liabilities

Zooming in on the latest balance sheet data, we can see that Unick had liabilities of ₩103.9b due within 12 months and liabilities of ₩14.1b due beyond that. Offsetting this, it had ₩31.8b in cash and ₩41.0b in receivables that were due within 12 months. So its liabilities total ₩45.1b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Unick has a market capitalization of ₩151.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Unick's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Unick had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to ₩216b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Unick produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩2.6b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩3.9b. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Unick (2 are a bit concerning) you should be aware of.

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. 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.
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