Does Unique Opto-ElectronicsLtd (GTSM:3441) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Unique Opto-Electronics Co.,Ltd. (GTSM:3441) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Unique Opto-ElectronicsLtd

What Is Unique Opto-ElectronicsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Unique Opto-ElectronicsLtd had NT$222.5m of debt, an increase on NT$106.5m, over one year. However, it does have NT$462.1m in cash offsetting this, leading to net cash of NT$239.6m.

How Healthy Is Unique Opto-ElectronicsLtd's Balance Sheet?

The latest balance sheet data shows that Unique Opto-ElectronicsLtd had liabilities of NT$282.6m due within a year, and liabilities of NT$18.4m falling due after that. On the other hand, it had cash of NT$462.1m and NT$66.5m worth of receivables due within a year. So it actually has NT$227.6m more liquid assets than total liabilities.

This surplus suggests that Unique Opto-ElectronicsLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Unique Opto-ElectronicsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Unique Opto-ElectronicsLtd'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.

In the last year Unique Opto-ElectronicsLtd had a loss before interest and tax, and actually shrunk its revenue by 29%, to NT$272m. That makes us nervous, to say the least.

So How Risky Is Unique Opto-ElectronicsLtd?

While Unique Opto-ElectronicsLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow NT$43m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Unique Opto-ElectronicsLtd that you should be aware of.

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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