UniTest Incorporation (KOSDAQ:086390) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies UniTest Incorporation (KOSDAQ:086390) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 UniTest Incorporation

What Is UniTest Incorporation's Net Debt?

As you can see below, UniTest Incorporation had ₩12.6b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩73.4b in cash, leading to a ₩60.7b net cash position.

How Strong Is UniTest Incorporation's Balance Sheet?

We can see from the most recent balance sheet that UniTest Incorporation had liabilities of ₩23.7b falling due within a year, and liabilities of ₩17.3b due beyond that. Offsetting this, it had ₩73.4b in cash and ₩8.34b in receivables that were due within 12 months. So it can boast ₩40.8b 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. Succinctly put, UniTest Incorporation boasts net cash, so it's fair to say it does not have a heavy debt load! 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 UniTest Incorporation's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year UniTest Incorporation had a loss before interest and tax, and actually shrunk its revenue by 40%, to ₩111b. To be frank that doesn't bode well.

So How Risky Is UniTest Incorporation?

Although UniTest Incorporation had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩27b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 UniTest Incorporation is showing 2 warning signs in our investment analysis , 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.

If you decide to trade UniTest Incorporation, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.