Here's Why Universal Scientific Industrial (Shanghai) (SHSE:601231) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Universal Scientific Industrial (Shanghai) Co., Ltd. (SHSE:601231) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Universal Scientific Industrial (Shanghai)

What Is Universal Scientific Industrial (Shanghai)'s Net Debt?

The image below, which you can click on for greater detail, shows that Universal Scientific Industrial (Shanghai) had debt of CN¥7.18b at the end of June 2024, a reduction from CN¥8.32b over a year. However, it does have CN¥10.5b in cash offsetting this, leading to net cash of CN¥3.33b.

How Healthy Is Universal Scientific Industrial (Shanghai)'s Balance Sheet?

We can see from the most recent balance sheet that Universal Scientific Industrial (Shanghai) had liabilities of CN¥16.5b falling due within a year, and liabilities of CN¥4.33b due beyond that. Offsetting these obligations, it had cash of CN¥10.5b as well as receivables valued at CN¥9.64b due within 12 months. So its liabilities total CN¥683.0m more than the combination of its cash and short-term receivables.

Since publicly traded Universal Scientific Industrial (Shanghai) shares are worth a total of CN¥32.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Universal Scientific Industrial (Shanghai) boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Universal Scientific Industrial (Shanghai)'s load is not too heavy, because its EBIT was down 26% 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 Universal Scientific Industrial (Shanghai)'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Universal Scientific Industrial (Shanghai) 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. Over the last three years, Universal Scientific Industrial (Shanghai) recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about Universal Scientific Industrial (Shanghai)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥3.33b. And it impressed us with free cash flow of CN¥3.1b, being 84% of its EBIT. So we don't have any problem with Universal Scientific Industrial (Shanghai)'s use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Universal Scientific Industrial (Shanghai) .

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.