Does China Union Holdings (SZSE:000036) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 China Union Holdings Ltd. (SZSE:000036) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for China Union Holdings

How Much Debt Does China Union Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that China Union Holdings had CN¥537.0m of debt in June 2024, down from CN¥631.6m, one year before. But on the other hand it also has CN¥2.26b in cash, leading to a CN¥1.72b net cash position.

How Strong Is China Union Holdings' Balance Sheet?

The latest balance sheet data shows that China Union Holdings had liabilities of CN¥1.21b due within a year, and liabilities of CN¥577.0m falling due after that. On the other hand, it had cash of CN¥2.26b and CN¥81.5m worth of receivables due within a year. So it can boast CN¥556.2m more liquid assets than total liabilities.

This surplus suggests that China Union Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that China Union Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that China Union Holdings's load is not too heavy, because its EBIT was down 88% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 China Union Holdings'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While China Union Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, China Union Holdings produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Union Holdings has CN¥1.72b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -CN¥219m, being 71% of its EBIT. So we are not troubled with China Union Holdings's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of China Union Holdings's earnings per share history for free.

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.

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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.