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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 United Integrated Services Co., Ltd. (TWSE:2404) makes use of debt. But is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for United Integrated Services

How Much Debt Does United Integrated Services Carry?

The image below, which you can click on for greater detail, shows that United Integrated Services had debt of NT$1.08b at the end of September 2024, a reduction from NT$5.27b over a year. However, it does have NT$22.0b in cash offsetting this, leading to net cash of NT$21.0b.

A Look At United Integrated Services' Liabilities

We can see from the most recent balance sheet that United Integrated Services had liabilities of NT$30.8b falling due within a year, and liabilities of NT$1.23b due beyond that. Offsetting this, it had NT$22.0b in cash and NT$17.0b in receivables that were due within 12 months. So it can boast NT$6.98b 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!

The good news is that United Integrated Services has increased its EBIT by 6.2% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine United Integrated Services'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 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. Happily for any shareholders, United Integrated Services 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 we empathize with investors who find debt concerning, you should keep in mind that United Integrated Services has net cash of NT$21.0b, as well as more liquid assets than liabilities. The cherry on top was that in converted 107% of that EBIT to free cash flow, bringing in NT$12b. 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. Be aware that United Integrated Services is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.