We Think Unisem (M) Berhad (KLSE:UNISEM) Is Taking Some Risk With Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Unisem (M) Berhad (KLSE:UNISEM) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Unisem (M) Berhad

How Much Debt Does Unisem (M) Berhad Carry?

As you can see below, at the end of September 2023, Unisem (M) Berhad had RM313.6m of debt, up from RM190.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM585.0m in cash, so it actually has RM271.4m net cash.

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

Zooming in on the latest balance sheet data, we can see that Unisem (M) Berhad had liabilities of RM394.1m due within 12 months and liabilities of RM261.0m due beyond that. Offsetting these obligations, it had cash of RM585.0m as well as receivables valued at RM190.7m due within 12 months. So it actually has 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. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 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

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 while Unisem (M) Berhad does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should learn about the 3 warning signs we've spotted with Unisem (M) Berhad (including 1 which shouldn't be ignored) .

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.