Does Unisem (M) Berhad (KLSE:UNISEM) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Unisem (M) Berhad (KLSE:UNISEM) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Unisem (M) Berhad

What Is Unisem (M) Berhad's Debt?

As you can see below, at the end of September 2022, Unisem (M) Berhad had RM190.4m of debt, up from RM170.0m a year ago. Click the image for more detail. But it also has RM579.4m in cash to offset that, meaning it has RM389.1m net cash.

How Strong Is Unisem (M) Berhad's Balance Sheet?

The latest balance sheet data shows that Unisem (M) Berhad had liabilities of RM491.2m due within a year, and liabilities of RM144.3m falling due after that. Offsetting this, it had RM579.4m in cash and RM228.7m in receivables that were due within 12 months. So it actually has RM172.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Unisem (M) Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Unisem (M) Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Unisem (M) Berhad grew its EBIT by 17% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Unisem (M) Berhad can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Unisem (M) Berhad 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. During the last three years, Unisem (M) Berhad burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Unisem (M) Berhad has RM389.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 17% over the last year. So we don't have any problem with Unisem (M) Berhad's use of debt. 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 Unisem (M) Berhad has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.