Is Universal Star (Holdings) (HKG:2346) Using Debt Sensibly?

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, Universal Star (Holdings) Limited (HKG:2346) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Universal Star (Holdings)

What Is Universal Star (Holdings)'s Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Universal Star (Holdings) had debt of CN¥29.9m, up from CN¥26.0m in one year. But it also has CN¥119.3m in cash to offset that, meaning it has CN¥89.3m net cash.

How Healthy Is Universal Star (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Universal Star (Holdings) had liabilities of CN¥85.1m due within 12 months and liabilities of CN¥11.1m due beyond that. Offsetting this, it had CN¥119.3m in cash and CN¥176.8m in receivables that were due within 12 months. So it can boast CN¥199.8m more liquid assets than total liabilities.

This luscious liquidity implies that Universal Star (Holdings)'s balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Universal Star (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Universal Star (Holdings) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Universal Star (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 39%, to CN¥250m. That makes us nervous, to say the least.

So How Risky Is Universal Star (Holdings)?

While Universal Star (Holdings) lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥22m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Universal Star (Holdings) you should know about.

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. 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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