These 4 Measures Indicate That UniTest Incorporation (KOSDAQ:086390) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that UniTest Incorporation (KOSDAQ:086390) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for UniTest Incorporation

What Is UniTest Incorporation's Debt?

You can click the graphic below for the historical numbers, but it shows that UniTest Incorporation had ₩15.9b of debt in December 2023, down from ₩17.8b, one year before. However, its balance sheet shows it holds ₩48.5b in cash, so it actually has ₩32.7b net cash.

How Strong Is UniTest Incorporation's Balance Sheet?

We can see from the most recent balance sheet that UniTest Incorporation had liabilities of ₩35.8b falling due within a year, and liabilities of ₩12.2b due beyond that. Offsetting these obligations, it had cash of ₩48.5b as well as receivables valued at ₩36.8b due within 12 months. So it can boast ₩37.3b more liquid assets than total liabilities.

This short term liquidity is a sign that UniTest Incorporation could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that UniTest Incorporation has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, UniTest Incorporation turned things around in the last 12 months, delivering and EBIT of ₩7.1b. When analysing debt levels, the balance sheet is the obvious place to start. But it is UniTest Incorporation'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. UniTest Incorporation 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 last year, UniTest Incorporation actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that UniTest Incorporation has net cash of ₩32.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩17b, being 235% of its EBIT. So is UniTest Incorporation's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for UniTest Incorporation (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.