These 4 measures indicate that Unimech Group Berhad (KLSE: UNIMECH) uses debt reasonably well
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Unimech Berhad Group (KLSE: UNIMECH) is in debt. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Discover our latest analysis for Unimech Group Berhad
What is the net debt of Unimech Group Berhad?
As you can see below, Unimech Group Berhad had a debt of RM 85.5 million in June 2021, up from RM 104.2 million a year earlier. On the other hand, he has RM42.4million in cash, resulting in net debt of about RM43.1million.
How strong is Unimech Group Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Unimech Group Berhad had liabilities of RM 123.4 million due within 12 months and RM 22.2 million liabilities due beyond. In return, he had RM42.4 million in cash and RM105.4 million in receivables due within 12 months. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.
Considering the size of Unimech Group Berhad, it appears that its liquidity is well balanced with its total liabilities. So the RM 227.4million company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
While Unimech Group Berhad’s low debt-to-EBITDA ratio of 0.97 suggests only a modest use of debt, the fact that EBIT only covered interest expense 5.3 times last year makes us think. We therefore recommend that you keep a close eye on the impact of financing costs on the business. It is important to note that Unimech Group Berhad’s EBIT has remained essentially stable over the past twelve months. We would rather see some growth in earnings as it always helps reduce debt. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; because Unimech Group Berhad will need profits to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, Unimech Group Berhad has generated strong free cash flow equivalent to 55% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Unimech Group Berhad’s net debt to EBITDA suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And we also thought his total liability level was positive. Looking at all of the aforementioned factors together, it seems to us that Unimech Group Berhad can manage its debt quite comfortably. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Unimech Group Berhad which you should know before investing here.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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