Is Unisem (M) Berhad (KLSE:UNISEM) A Risky Investment?

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 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 Unisem (M) Berhad (KLSE:UNISEM) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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 Unisem (M) Berhad

What Is Unisem (M) Berhad's Net Debt?

The chart below, which you can click on for greater detail, shows that Unisem (M) Berhad had RM203.3m in debt in March 2022; about the same as the year before. But on the other hand it also has RM553.6m in cash, leading to a RM350.4m net cash position.

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

The latest balance sheet data shows that Unisem (M) Berhad had liabilities of RM495.8m due within a year, and liabilities of RM152.3m falling due after that. Offsetting this, it had RM553.6m in cash and RM213.0m in receivables that were due within 12 months. So it actually has RM118.6m more liquid assets than total liabilities.

This surplus suggests that Unisem (M) Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Unisem (M) Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Unisem (M) Berhad has increased its EBIT by 6.3% over twelve months, which should ease any concerns about debt repayment. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Unisem (M) Berhad saw substantial negative free cash flow, in total. 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 RM350.4m in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 6.3% in the last twelve months. So we don't have any problem with Unisem (M) Berhad's use of debt. 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. For instance, we've identified 1 warning sign for Unisem (M) Berhad that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.