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.' 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 can see that Unigroup Guoxin Microelectronics Co., Ltd. (SZSE:002049) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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, 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.

How Much Debt Does Unigroup Guoxin Microelectronics Carry?

As you can see below, Unigroup Guoxin Microelectronics had CN¥1.84b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥5.04b in cash to offset that, meaning it has CN¥3.19b net cash.

How Strong Is Unigroup Guoxin Microelectronics' Balance Sheet?

We can see from the most recent balance sheet that Unigroup Guoxin Microelectronics had liabilities of CN¥3.93b falling due within a year, and liabilities of CN¥1.87b due beyond that. On the other hand, it had cash of CN¥5.04b and CN¥6.28b worth of receivables due within a year. So it actually has CN¥5.51b 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!

On the other hand, Unigroup Guoxin Microelectronics saw its EBIT drop by 7.9% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Unigroup Guoxin Microelectronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 51% 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 it is always sensible to investigate a company's debt, in this case Unigroup Guoxin Microelectronics has CN¥3.19b in net cash and a decent-looking balance sheet. So we are not troubled with Unigroup Guoxin Microelectronics's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Unigroup Guoxin Microelectronics's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.