Unitech Electronics (GTSM:3652) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Unitech Electronics Co., Ltd. (GTSM:3652) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Unitech Electronics

How Much Debt Does Unitech Electronics Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Unitech Electronics had NT$100.0m of debt, an increase on NT$70.0m, over one year. However, its balance sheet shows it holds NT$180.8m in cash, so it actually has NT$80.8m net cash.

A Look At Unitech Electronics's Liabilities

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. On the other hand, it had cash of NT$180.8m and NT$422.7m worth of receivables due within a year. 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. Succinctly put, Unitech Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Unitech Electronics made a loss at the EBIT level, last year, it was also good to see that it generated NT$15m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Unitech Electronics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Unitech Electronics 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. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Unitech Electronics you should be aware of, and 1 of them shouldn't be ignored.

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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