These 4 Measures Indicate That United Microelectronics (TWSE:2303) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, United Microelectronics Corporation (TWSE:2303) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for United Microelectronics

How Much Debt Does United Microelectronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 United Microelectronics had NT$69.0b of debt, an increase on NT$47.1b, over one year. But it also has NT$132.2b in cash to offset that, meaning it has NT$63.2b net cash.

A Look At United Microelectronics' Liabilities

Zooming in on the latest balance sheet data, we can see that United Microelectronics had liabilities of NT$88.4b due within 12 months and liabilities of NT$100.4b due beyond that. Offsetting these obligations, it had cash of NT$132.2b as well as receivables valued at NT$35.1b due within 12 months. So it has liabilities totalling NT$21.6b more than its cash and near-term receivables, combined.

Of course, United Microelectronics has a titanic market capitalization of NT$642.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, United Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that United Microelectronics's load is not too heavy, because its EBIT was down 43% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Microelectronics'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. United Microelectronics 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. In the last three years, United Microelectronics's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about United Microelectronics's liabilities, but we can be reassured by the fact it has has net cash of NT$63.2b. So we don't have any problem with United Microelectronics's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for United Microelectronics (1 is potentially serious) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com