Does Unimicron Technology (TWSE:3037) Have A Healthy Balance Sheet?

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. We can see that Unimicron Technology Corp. (TWSE:3037) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Unimicron Technology

What Is Unimicron Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Unimicron Technology had debt of NT$35.3b, up from NT$30.5b in one year. But on the other hand it also has NT$51.2b in cash, leading to a NT$15.8b net cash position.

A Look At Unimicron Technology's Liabilities

The latest balance sheet data shows that Unimicron Technology had liabilities of NT$54.8b due within a year, and liabilities of NT$76.8b falling due after that. Offsetting this, it had NT$51.2b in cash and NT$23.7b in receivables that were due within 12 months. So it has liabilities totalling NT$56.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Unimicron Technology is worth NT$222.5b, and thus could probably raise enough capital to shore up 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. Despite its noteworthy liabilities, Unimicron Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Unimicron Technology's saving grace is its low debt levels, because its EBIT has tanked 76% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Unimicron Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Unimicron Technology 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. During the last three years, Unimicron Technology generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Unimicron Technology does have more liabilities than liquid assets, it also has net cash of NT$15.8b. And it impressed us with free cash flow of -NT$6.0b, being 94% of its EBIT. So we are not troubled with Unimicron Technology's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Unimicron Technology (1 shouldn't be ignored!) that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.