We Think China United Network Communications (SHSE:600050) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, China United Network Communications Limited (SHSE:600050) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for China United Network Communications

What Is China United Network Communications's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China United Network Communications had CN¥3.05b of debt in June 2024, down from CN¥7.80b, one year before. However, its balance sheet shows it holds CN¥80.1b in cash, so it actually has CN¥77.0b net cash.

A Look At China United Network Communications' Liabilities

According to the last reported balance sheet, China United Network Communications had liabilities of CN¥260.3b due within 12 months, and liabilities of CN¥39.8b due beyond 12 months. On the other hand, it had cash of CN¥80.1b and CN¥70.0b worth of receivables due within a year. So its liabilities total CN¥150.0b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's huge CN¥149.5b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that China United Network Communications has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

The good news is that China United Network Communications has increased its EBIT by 9.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China United Network Communications can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China United Network Communications may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, China United Network Communications actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although China United Network Communications's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥77.0b. The cherry on top was that in converted 153% of that EBIT to free cash flow, bringing in CN¥17b. So we don't have any problem with China United Network Communications's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 China United Network Communications .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.