Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 United Nova Technology Co.,Ltd. (SHSE:688469) does use debt in its business. But should shareholders be worried about its use of debt?

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 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.

How Much Debt Does United Nova TechnologyLtd Carry?

As you can see below, at the end of September 2024, United Nova TechnologyLtd had CN¥12.2b of debt, up from CN¥9.98b a year ago. Click the image for more detail. However, it also had CN¥4.75b in cash, and so its net debt is CN¥7.49b.

How Healthy Is United Nova TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, United Nova TechnologyLtd had liabilities of CN¥8.11b due within 12 months, and liabilities of CN¥8.09b due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.75b as well as receivables valued at CN¥1.22b due within 12 months. So it has liabilities totalling CN¥10.2b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since United Nova TechnologyLtd has a market capitalization of CN¥40.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine United Nova TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year United Nova TechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to CN¥6.0b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months United Nova TechnologyLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥2.7b. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥2.8b of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that United Nova TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.