Is UNISEM (KOSDAQ:036200) Using Too Much Debt?

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.' 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. As with many other companies UNISEM Co., Ltd. (KOSDAQ:036200) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for UNISEM

What Is UNISEM's Net Debt?

As you can see below, UNISEM had ₩16.7b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩79.4b in cash offsetting this, leading to net cash of ₩62.7b.

A Look At UNISEM's Liabilities

We can see from the most recent balance sheet that UNISEM had liabilities of ₩39.1b falling due within a year, and liabilities of ₩3.08b due beyond that. On the other hand, it had cash of ₩79.4b and ₩42.6b worth of receivables due within a year. So it actually has ₩79.9b more liquid assets than total liabilities.

It's good to see that UNISEM has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that UNISEM has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that UNISEM grew its EBIT by 182% over twelve months. That boost will make it even easier to pay down debt going forward. 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 UNISEM'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. UNISEM 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. Over the most recent three years, UNISEM recorded free cash flow worth 62% 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 we empathize with investors who find debt concerning, you should keep in mind that UNISEM has net cash of ₩62.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 182% year-on-year EBIT growth. So is UNISEM's debt a risk? It doesn't seem so to us. 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. Be aware that UNISEM is showing 1 warning sign in our investment analysis , you should know about...

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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