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These 4 Measures Indicate That UMC Electronics (TSE:6615) Is Using Debt Extensively

Simply Wall St · 1d ago

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies UMC Electronics Co., Ltd. (TSE:6615) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

What Is UMC Electronics's Net Debt?

The image below, which you can click on for greater detail, shows that UMC Electronics had debt of JP¥31.9b at the end of September 2025, a reduction from JP¥33.6b over a year. On the flip side, it has JP¥11.3b in cash leading to net debt of about JP¥20.6b.

debt-equity-history-analysis
TSE:6615 Debt to Equity History December 5th 2025

A Look At UMC Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that UMC Electronics had liabilities of JP¥45.6b due within 12 months and liabilities of JP¥11.2b due beyond that. Offsetting this, it had JP¥11.3b in cash and JP¥13.6b in receivables that were due within 12 months. So it has liabilities totalling JP¥32.0b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the JP¥9.99b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, UMC Electronics would probably need a major re-capitalization if its creditors were to demand repayment.

View our latest analysis for UMC Electronics

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

UMC Electronics has a debt to EBITDA ratio of 3.7 and its EBIT covered its interest expense 5.8 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Unfortunately, UMC Electronics saw its EBIT slide 5.2% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is UMC Electronics's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, UMC Electronics actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Mulling over UMC Electronics's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that UMC Electronics's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. For example UMC Electronics has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.