Here's Why Uni-President China Holdings (HKG:220) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Uni-President China Holdings Ltd (HKG:220) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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.

Check out our latest analysis for Uni-President China Holdings

How Much Debt Does Uni-President China Holdings Carry?

As you can see below, Uni-President China Holdings had CN¥1.75b of debt at June 2024, down from CN¥2.60b a year prior. But on the other hand it also has CN¥4.17b in cash, leading to a CN¥2.42b net cash position.

How Strong Is Uni-President China Holdings' Balance Sheet?

We can see from the most recent balance sheet that Uni-President China Holdings had liabilities of CN¥8.31b falling due within a year, and liabilities of CN¥822.7m due beyond that. On the other hand, it had cash of CN¥4.17b and CN¥650.9m worth of receivables due within a year. So its liabilities total CN¥4.31b more than the combination of its cash and short-term receivables.

Given Uni-President China Holdings has a market capitalization of CN¥27.6b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Uni-President China Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Uni-President China Holdings saw its EBIT drop by 3.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Uni-President China 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Uni-President China Holdings 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, Uni-President China 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 Uni-President China Holdings does have more liabilities than liquid assets, it also has net cash of CN¥2.42b. And it impressed us with free cash flow of CN¥2.8b, being 118% of its EBIT. So we don't think Uni-President China Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Uni-President China Holdings , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.