Would Unitech Printed Circuit Board (TPE:2367) Be Better Off With Less Debt?

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.' 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, Unitech Printed Circuit Board Corp. (TPE:2367) does carry debt. But the real question is whether this debt is making the company risky.

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 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 Unitech Printed Circuit Board

How Much Debt Does Unitech Printed Circuit Board Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Unitech Printed Circuit Board had debt of NT$8.03b, up from NT$6.77b in one year. However, because it has a cash reserve of NT$1.07b, its net debt is less, at about NT$6.97b.

How Healthy Is Unitech Printed Circuit Board's Balance Sheet?

We can see from the most recent balance sheet that Unitech Printed Circuit Board had liabilities of NT$7.76b falling due within a year, and liabilities of NT$6.40b due beyond that. Offsetting this, it had NT$1.07b in cash and NT$4.44b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$8.65b.

This is a mountain of leverage relative to its market capitalization of NT$13.8b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Unitech Printed Circuit Board 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.

Over 12 months, Unitech Printed Circuit Board made a loss at the EBIT level, and saw its revenue drop to NT$14b, which is a fall of 36%. 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. Its EBIT loss was a whopping NT$2.3b. 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$890m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Unitech Printed Circuit Board has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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