Is UniTest Incorporation (KOSDAQ:086390) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that UniTest Incorporation (KOSDAQ:086390) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for UniTest Incorporation

What Is UniTest Incorporation's Debt?

The image below, which you can click on for greater detail, shows that UniTest Incorporation had debt of ₩15.5b at the end of June 2024, a reduction from ₩27.4b over a year. However, it does have ₩32.2b in cash offsetting this, leading to net cash of ₩16.6b.

How Healthy Is UniTest Incorporation's Balance Sheet?

We can see from the most recent balance sheet that UniTest Incorporation had liabilities of ₩36.9b falling due within a year, and liabilities of ₩12.3b due beyond that. Offsetting these obligations, it had cash of ₩32.2b as well as receivables valued at ₩31.8b due within 12 months. So it actually has ₩14.8b more liquid assets than total liabilities.

This surplus suggests that UniTest Incorporation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, UniTest Incorporation boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is UniTest Incorporation's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, UniTest Incorporation made a loss at the EBIT level, and saw its revenue drop to ₩85b, which is a fall of 58%. That makes us nervous, to say the least.

So How Risky Is UniTest Incorporation?

While UniTest Incorporation lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩8.8b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for UniTest Incorporation (of which 1 is a bit unpleasant!) 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.

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