Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Unigroup Guoxin Microelectronics Co., Ltd. (SZSE:002049) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.
Check out our latest analysis for Unigroup Guoxin Microelectronics
What Is Unigroup Guoxin Microelectronics's Debt?
The image below, which you can click on for greater detail, shows that Unigroup Guoxin Microelectronics had debt of CN¥1.78b at the end of June 2023, a reduction from CN¥1.90b over a year. However, it does have CN¥4.35b in cash offsetting this, leading to net cash of CN¥2.56b.
A Look At Unigroup Guoxin Microelectronics' Liabilities
Zooming in on the latest balance sheet data, we can see that Unigroup Guoxin Microelectronics had liabilities of CN¥4.27b due within 12 months and liabilities of CN¥1.79b due beyond that. Offsetting this, it had CN¥4.35b in cash and CN¥5.82b in receivables that were due within 12 months. So it can boast CN¥4.10b more liquid assets than total liabilities.
This surplus suggests that Unigroup Guoxin Microelectronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Unigroup Guoxin Microelectronics boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Unigroup Guoxin Microelectronics grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Unigroup Guoxin Microelectronics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Unigroup Guoxin Microelectronics 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, Unigroup Guoxin Microelectronics produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Unigroup Guoxin Microelectronics has net cash of CN¥2.56b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So is Unigroup Guoxin Microelectronics's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Unigroup Guoxin Microelectronics, you may well want to click here to check an interactive graph of its earnings per share history.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.