Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Unionman Technology Co.,Ltd. (SHSE:688609) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Unionman TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Unionman TechnologyLtd had CN¥1.28b of debt, an increase on CN¥893.3m, over one year. However, because it has a cash reserve of CN¥283.9m, its net debt is less, at about CN¥996.1m.

How Healthy Is Unionman TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Unionman TechnologyLtd had liabilities of CN¥1.78b due within 12 months, and liabilities of CN¥386.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥283.9m as well as receivables valued at CN¥1.14b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥743.6m.

Given Unionman TechnologyLtd has a market capitalization of CN¥4.81b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Unionman TechnologyLtd 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.

In the last year Unionman TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 6.4%, to CN¥2.3b. We would much prefer see growth.

Caveat Emptor

Importantly, Unionman TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥221m at the EBIT level. 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 CN¥329m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Unionman TechnologyLtd has 2 warning signs we think you should be aware of.

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.