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

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. Importantly, UNIC Technology Corp. (GTSM:5452) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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.

Check out our latest analysis for UNIC Technology

How Much Debt Does UNIC Technology Carry?

The image below, which you can click on for greater detail, shows that at December 2020 UNIC Technology had debt of NT$931.1m, up from NT$696.8m in one year. However, because it has a cash reserve of NT$747.4m, its net debt is less, at about NT$183.8m.

How Healthy Is UNIC Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that UNIC Technology had liabilities of NT$1.34b due within 12 months and liabilities of NT$180.5m due beyond that. Offsetting these obligations, it had cash of NT$747.4m as well as receivables valued at NT$1.65b due within 12 months. So it actually has NT$871.1m more liquid assets than total liabilities.

This luscious liquidity implies that UNIC Technology's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

UNIC Technology's net debt is only 0.64 times its EBITDA. And its EBIT covers its interest expense a whopping 26.3 times over. So we're pretty relaxed about its super-conservative use of debt. Better yet, UNIC Technology grew its EBIT by 140% 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 you can't view debt in total isolation; since UNIC Technology will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, UNIC Technology actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, UNIC Technology's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. After looking at a variety of factors, it's pretty clear to us that UNIC Technology has a very strong balance sheet. We're no more concerned about its debt than sailing off the edge of the earth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for UNIC Technology you should be aware of, and 1 of them makes us a bit uncomfortable.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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