Unisplendour (SZSE:000938) Has A Somewhat Strained Balance Sheet

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 Unisplendour Corporation Limited (SZSE:000938) 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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Unisplendour

What Is Unisplendour's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Unisplendour had debt of CN¥12.9b, up from CN¥6.64b in one year. But on the other hand it also has CN¥13.4b in cash, leading to a CN¥471.6m net cash position.

A Look At Unisplendour's Liabilities

The latest balance sheet data shows that Unisplendour had liabilities of CN¥36.5b due within a year, and liabilities of CN¥7.38b falling due after that. Offsetting this, it had CN¥13.4b in cash and CN¥15.2b in receivables that were due within 12 months. So its liabilities total CN¥15.3b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Unisplendour is worth CN¥64.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Unisplendour boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Unisplendour if management cannot prevent a repeat of the 29% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Unisplendour'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 Unisplendour 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, Unisplendour burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Unisplendour does have more liabilities than liquid assets, it also has net cash of CN¥471.6m. So although we see some areas for improvement, we're not too worried about Unisplendour's balance sheet. 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. Case in point: We've spotted 1 warning sign for Unisplendour you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.