Unizyx Holding (TPE:3704) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Unizyx Holding Corporation (TPE:3704) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Unizyx Holding

How Much Debt Does Unizyx Holding Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Unizyx Holding had debt of NT$2.08b, up from NT$787.3m in one year. However, it does have NT$3.87b in cash offsetting this, leading to net cash of NT$1.79b.

How Strong Is Unizyx Holding's Balance Sheet?

According to the last reported balance sheet, Unizyx Holding had liabilities of NT$9.56b due within 12 months, and liabilities of NT$596.2m due beyond 12 months. On the other hand, it had cash of NT$3.87b and NT$5.10b worth of receivables due within a year. So its liabilities total NT$1.19b more than the combination of its cash and short-term receivables.

Of course, Unizyx Holding has a market capitalization of NT$15.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Unizyx Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Unizyx Holding's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Unizyx Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Unizyx Holding 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. Happily for any shareholders, Unizyx Holding actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Unizyx Holding has NT$1.79b in net cash. And it impressed us with free cash flow of NT$581m, being 143% of its EBIT. So we don't have any problem with Unizyx Holding's use of debt. 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 Unizyx Holding you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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