Does Unique Fire Holdings Berhad (KLSE:UNIQUE) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Unique Fire Holdings Berhad (KLSE:UNIQUE) does use debt in its business. 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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Unique Fire Holdings Berhad

What Is Unique Fire Holdings Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Unique Fire Holdings Berhad had debt of RM9.40m at the end of March 2024, a reduction from RM11.8m over a year. But it also has RM22.1m in cash to offset that, meaning it has RM12.7m net cash.

How Healthy Is Unique Fire Holdings Berhad's Balance Sheet?

We can see from the most recent balance sheet that Unique Fire Holdings Berhad had liabilities of RM11.2m falling due within a year, and liabilities of RM8.85m due beyond that. Offsetting this, it had RM22.1m in cash and RM28.1m in receivables that were due within 12 months. So it actually has RM30.1m more liquid assets than total liabilities.

This excess liquidity suggests that Unique Fire Holdings Berhad is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Unique Fire Holdings Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Unique Fire Holdings Berhad grew its EBIT by 151% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Unique Fire Holdings Berhad will need earnings to service that debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Unique Fire Holdings Berhad 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. In the last three years, Unique Fire Holdings Berhad's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Unique Fire Holdings Berhad has net cash of RM12.7m, as well as more liquid assets than liabilities. And we liked the look of last year's 151% year-on-year EBIT growth. So we don't think Unique Fire Holdings Berhad's use of debt is risky. 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. For example, we've discovered 4 warning signs for Unique Fire Holdings Berhad (1 can't be ignored!) 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.