Here's Why Union Asia Enterprise Holdings (HKG:8173) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Union Asia Enterprise Holdings Limited (HKG:8173) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Union Asia Enterprise Holdings

What Is Union Asia Enterprise Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Union Asia Enterprise Holdings had debt of HK$49.6m at the end of March 2021, a reduction from HK$54.7m over a year. But it also has HK$72.4m in cash to offset that, meaning it has HK$22.8m net cash.

How Strong Is Union Asia Enterprise Holdings' Balance Sheet?

According to the last reported balance sheet, Union Asia Enterprise Holdings had liabilities of HK$58.1m due within 12 months, and liabilities of HK$964.0k due beyond 12 months. Offsetting this, it had HK$72.4m in cash and HK$26.2m in receivables that were due within 12 months. So it actually has HK$39.5m more liquid assets than total liabilities.

This luscious liquidity implies that Union Asia Enterprise Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Union Asia Enterprise Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Union Asia Enterprise Holdings's EBIT was down 74% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is Union Asia Enterprise Holdings'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, a company can only pay off debt with cold hard cash, not accounting profits. While Union Asia Enterprise 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. Over the last three years, Union Asia Enterprise Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Union Asia Enterprise Holdings has HK$22.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$17m, being 124% of its EBIT. So is Union Asia Enterprise Holdings's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 4 warning signs for Union Asia Enterprise Holdings you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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