Unisem (M) Berhad (KLSE:UNISEM) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Unisem (M) Berhad had RM313.6m of debt, an increase on RM190.4m, over one year. But it also has RM585.0m in cash to offset that, meaning it has RM271.4m net cash.

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

According to the last reported balance sheet, Unisem (M) Berhad had liabilities of RM394.1m due within 12 months, and liabilities of RM261.0m due beyond 12 months. Offsetting this, it had RM585.0m in cash and RM190.7m in receivables that were due within 12 months. So it can boast RM120.6m 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 modesty of its debt load may become crucial for Unisem (M) Berhad if management cannot prevent a repeat of the 45% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Unisem (M) Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. 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 RM271.4m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Unisem (M) Berhad's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Unisem (M) Berhad , and understanding them should be part of your investment process.

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.