United Integrated Services (TWSE:2404) Seems To Use Debt Rather Sparingly

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, United Integrated Services Co., Ltd. (TWSE:2404) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 United Integrated Services

What Is United Integrated Services's Debt?

As you can see below, at the end of December 2023, United Integrated Services had NT$3.23b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$19.2b in cash, so it actually has NT$16.0b net cash.

How Healthy Is United Integrated Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that United Integrated Services had liabilities of NT$33.1b due within 12 months and liabilities of NT$963.7m due beyond that. Offsetting these obligations, it had cash of NT$19.2b as well as receivables valued at NT$21.5b due within 12 months. So it can boast NT$6.73b more liquid assets than total liabilities.

This short term liquidity is a sign that United Integrated Services could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, United Integrated Services boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that United Integrated Services grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is United Integrated Services'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While United Integrated Services 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, United Integrated Services recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that United Integrated Services has net cash of NT$16.0b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$4.4b, being 85% of its EBIT. So is United Integrated Services's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with United Integrated Services (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.