These 4 Measures Indicate That Uni-President China Holdings (HKG:220) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Uni-President China Holdings Ltd (HKG:220) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Uni-President China Holdings

How Much Debt Does Uni-President China Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Uni-President China Holdings had CN¥2.74b of debt, an increase on CN¥1.67b, over one year. However, its balance sheet shows it holds CN¥4.25b in cash, so it actually has CN¥1.50b net cash.

A Look At Uni-President China Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Uni-President China Holdings had liabilities of CN¥9.12b due within 12 months and liabilities of CN¥729.7m due beyond that. Offsetting these obligations, it had cash of CN¥4.25b as well as receivables valued at CN¥782.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.82b.

Of course, Uni-President China Holdings has a market capitalization of CN¥25.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 9.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Uni-President China Holdings does have more liabilities than liquid assets, it also has net cash of CN¥1.50b. The cherry on top was that in converted 134% of that EBIT to free cash flow, bringing in CN¥1.7b. So we don't have any problem with Uni-President China Holdings'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. For instance, we've identified 1 warning sign for Uni-President China Holdings that you should be aware of.

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.