These 4 Measures Indicate That UNIC Technology (GTSM:5452) Is Using Debt Safely

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that UNIC Technology Corp. (GTSM:5452) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for UNIC Technology

What Is UNIC Technology's Debt?

As you can see below, UNIC Technology had NT$579.9m of debt at September 2020, down from NT$839.8m a year prior. However, its balance sheet shows it holds NT$624.0m in cash, so it actually has NT$44.1m net cash.

How Healthy Is UNIC Technology's Balance Sheet?

According to the last reported balance sheet, UNIC Technology had liabilities of NT$967.1m due within 12 months, and liabilities of NT$136.1m due beyond 12 months. Offsetting this, it had NT$624.0m in cash and NT$1.51b in receivables that were due within 12 months. So it can boast NT$1.03b more liquid assets than total liabilities.

This surplus liquidity suggests that UNIC Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, UNIC Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, UNIC Technology grew its EBIT by 164% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is UNIC Technology's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. UNIC Technology 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. Happily for any shareholders, UNIC Technology actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case UNIC Technology has NT$44.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$372m, being 341% of its EBIT. At the end of the day we're not concerned about UNIC Technology's debt. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with UNIC Technology , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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