Unisem (M) Berhad (KLSE:UNISEM) Has A Somewhat Strained 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Unisem (M) Berhad (KLSE:UNISEM) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View 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 RM206.8m at the end of September 2024, a reduction from RM313.6m over a year. However, its balance sheet shows it holds RM327.3m in cash, so it actually has RM120.5m net cash.

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

We can see from the most recent balance sheet that Unisem (M) Berhad had liabilities of RM479.8m falling due within a year, and liabilities of RM197.2m due beyond that. On the other hand, it had cash of RM327.3m and RM263.9m worth of receivables due within a year. So its liabilities total RM85.9m more than the combination of its cash and short-term receivables.

Given Unisem (M) Berhad has a market capitalization of RM3.87b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Unisem (M) Berhad also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Unisem (M) Berhad if management cannot prevent a repeat of the 35% 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 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.

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. Over the last three years, Unisem (M) Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about Unisem (M) Berhad's liabilities, but we can be reassured by the fact it has has net cash of RM120.5m. So although we see some areas for improvement, we're not too worried about Unisem (M) Berhad's balance sheet. 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. We've identified 2 warning signs with Unisem (M) Berhad (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.