Unisem (M) Berhad (KLSE:UNISEM) Has A Pretty 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 note that Unisem (M) Berhad (KLSE:UNISEM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Unisem (M) Berhad

How Much Debt Does Unisem (M) Berhad Carry?

The image below, which you can click on for greater detail, shows that Unisem (M) Berhad had debt of RM157.9m at the end of March 2023, a reduction from RM203.3m over a year. However, its balance sheet shows it holds RM456.1m in cash, so it actually has RM298.1m net cash.

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

The latest balance sheet data shows that Unisem (M) Berhad had liabilities of RM359.1m due within a year, and liabilities of RM141.6m falling due after that. Offsetting these obligations, it had cash of RM456.1m as well as receivables valued at RM197.3m due within 12 months. So it can boast RM152.6m 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. Simply put, the fact that Unisem (M) Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Unisem (M) Berhad grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. 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 Unisem (M) Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Unisem (M) 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. 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 we empathize with investors who find debt concerning, you should keep in mind that Unisem (M) Berhad has net cash of RM298.1m, as well as more liquid assets than liabilities. And it also grew its EBIT by 5.1% over the last year. So we are not troubled with Unisem (M) Berhad's debt use. 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. Be aware that Unisem (M) Berhad is showing 2 warning signs in our investment analysis , you should know about...

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.