Would Unifi (NYSE:UFI) Be Better Off With Less Debt?

Simply Wall St · 10/15 10:20

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.' 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 note that Unifi, Inc. (NYSE:UFI) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Unifi

How Much Debt Does Unifi Carry?

As you can see below, Unifi had US$120.7m of debt at June 2024, down from US$129.8m a year prior. However, it also had US$26.8m in cash, and so its net debt is US$93.9m.

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NYSE:UFI Debt to Equity History October 15th 2024

A Look At Unifi's Liabilities

We can see from the most recent balance sheet that Unifi had liabilities of US$76.6m falling due within a year, and liabilities of US$129.3m due beyond that. On the other hand, it had cash of US$26.8m and US$82.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$96.7m.

This is a mountain of leverage relative to its market capitalization of US$126.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Unifi'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 Unifi had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to US$582m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Unifi produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$32m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$9.1m of cash over the last year. So suffice it to say we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Unifi insider transactions.

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.