Does Unitech Electronics (GTSM:3652) 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.' 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. As with many other companies Unitech Electronics Co., Ltd. (GTSM:3652) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Unitech Electronics

What Is Unitech Electronics's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Unitech Electronics had debt of NT$100.0m, up from NT$70.0m in one year. But it also has NT$180.8m in cash to offset that, meaning it has NT$80.8m net cash.

How Healthy Is Unitech Electronics' Balance Sheet?

The latest balance sheet data shows that Unitech Electronics had liabilities of NT$473.5m due within a year, and liabilities of NT$76.2m falling due after that. Offsetting these obligations, it had cash of NT$180.8m as well as receivables valued at NT$422.7m due within 12 months. So it can boast NT$53.8m more liquid assets than total liabilities.

This surplus suggests that Unitech Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Unitech Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Unitech Electronics turned things around in the last 12 months, delivering and EBIT of NT$15m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Unitech Electronics 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. While Unitech Electronics 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 year, Unitech Electronics actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Unitech Electronics has NT$80.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 406% of that EBIT to free cash flow, bringing in NT$60m. So we don't think Unitech Electronics's use of debt is risky. 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. We've identified 2 warning signs with Unitech Electronics (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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