Unimicron Technology (TWSE:3037) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Unimicron Technology had debt of NT$38.6b, up from NT$30.9b in one year. However, its balance sheet shows it holds NT$40.1b in cash, so it actually has NT$1.44b net cash.

How Strong Is Unimicron Technology's Balance Sheet?

We can see from the most recent balance sheet that Unimicron Technology had liabilities of NT$53.0b falling due within a year, and liabilities of NT$76.1b due beyond that. Offsetting this, it had NT$40.1b in cash and NT$28.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$61.0b.

While this might seem like a lot, it is not so bad since Unimicron Technology has a market capitalization of NT$221.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 66% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Unimicron Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Unimicron Technology's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$1.44b. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in -NT$12b. So we don't have any problem with Unimicron Technology's use of debt. 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. Case in point: We've spotted 3 warning signs for Unimicron Technology you should be aware of, and 1 of them shouldn't be ignored.

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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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.