We Think Unitech Printed Circuit Board (TPE:2367) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Unitech Printed Circuit Board Corp. (TPE:2367) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Unitech Printed Circuit Board

What Is Unitech Printed Circuit Board's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Unitech Printed Circuit Board had NT$7.85b of debt, an increase on NT$6.43b, over one year. However, because it has a cash reserve of NT$771.6m, its net debt is less, at about NT$7.08b.

A Look At Unitech Printed Circuit Board's Liabilities

We can see from the most recent balance sheet that Unitech Printed Circuit Board had liabilities of NT$5.98b falling due within a year, and liabilities of NT$7.43b due beyond that. Offsetting these obligations, it had cash of NT$771.6m as well as receivables valued at NT$4.02b due within 12 months. So it has liabilities totalling NT$8.63b more than its cash and near-term receivables, combined.

Unitech Printed Circuit Board has a market capitalization of NT$14.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Unitech Printed Circuit Board 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.

In the last year Unitech Printed Circuit Board had a loss before interest and tax, and actually shrunk its revenue by 29%, to NT$15b. That makes us nervous, to say the least.

Caveat Emptor

While Unitech Printed Circuit Board's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$983m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through NT$1.5b of cash over the last year. So in short it's a really risky stock. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Unitech Printed Circuit Board (of which 1 doesn't sit too well with us!) 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. 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.
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