Uniflex Technology (TWSE:3321) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Uniflex Technology Inc. (TWSE:3321) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Uniflex Technology

What Is Uniflex Technology's Net Debt?

As you can see below, Uniflex Technology had NT$685.3m of debt at September 2024, down from NT$938.1m a year prior. However, it does have NT$188.9m in cash offsetting this, leading to net debt of about NT$496.4m.

A Look At Uniflex Technology's Liabilities

The latest balance sheet data shows that Uniflex Technology had liabilities of NT$1.03b due within a year, and liabilities of NT$322.0m falling due after that. Offsetting these obligations, it had cash of NT$188.9m as well as receivables valued at NT$912.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$254.7m.

Uniflex Technology has a market capitalization of NT$1.23b, so it could very likely raise cash to ameliorate 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to NT$1.9b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Uniflex Technology's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping NT$267m. 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. Another cause for caution is that is bled NT$277m in negative free cash flow over the last twelve months. 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. We've identified 2 warning signs with Uniflex Technology (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.