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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that UNISEM Co., Ltd. (KOSDAQ:036200) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 UNISEM

What Is UNISEM's Debt?

You can click the graphic below for the historical numbers, but it shows that UNISEM had ₩15.0b of debt in December 2020, down from ₩16.7b, one year before. But it also has ₩75.6b in cash to offset that, meaning it has ₩60.6b net cash.

How Healthy Is UNISEM's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that UNISEM had liabilities of ₩47.0b due within 12 months and liabilities of ₩3.00b due beyond that. Offsetting this, it had ₩75.6b in cash and ₩50.2b in receivables that were due within 12 months. So it can boast ₩75.9b more liquid assets than total liabilities.

This excess liquidity suggests that UNISEM is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any 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.

In addition to that, we're happy to report that UNISEM has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. 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 UNISEM 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 UNISEM 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, UNISEM recorded free cash flow worth 55% 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 it is always sensible to investigate a company's debt, in this case UNISEM has ₩60.6b in net cash and a decent-looking balance sheet. And we liked the look of last year's 34% year-on-year EBIT growth. So is UNISEM's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with UNISEM , and understanding them should be part of your investment process.

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. 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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