Uniflex Technology (TPE:3321) Is Making Moderate Use Of 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.' 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, Uniflex Technology Inc. (TPE:3321) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Uniflex Technology

How Much Debt Does Uniflex Technology Carry?

As you can see below, Uniflex Technology had NT$1.21b of debt at September 2020, down from NT$1.56b a year prior. However, it also had NT$200.1m in cash, and so its net debt is NT$1.01b.

How Healthy Is Uniflex Technology's Balance Sheet?

We can see from the most recent balance sheet that Uniflex Technology had liabilities of NT$1.61b falling due within a year, and liabilities of NT$166.2m due beyond that. Offsetting this, it had NT$200.1m in cash and NT$876.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$703.0m.

This deficit isn't so bad because Uniflex Technology is worth NT$2.17b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Uniflex Technology 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 Uniflex Technology had a loss before interest and tax, and actually shrunk its revenue by 14%, to NT$2.0b. That's not what we would hope to see.

Caveat Emptor

While Uniflex Technology'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$195m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$66m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Uniflex Technology (including 1 which is concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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