Is United Laboratories International Holdings (HKG:3933) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that The United Laboratories International Holdings Limited (HKG:3933) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for United Laboratories International Holdings

How Much Debt Does United Laboratories International Holdings Carry?

The image below, which you can click on for greater detail, shows that United Laboratories International Holdings had debt of CN¥2.25b at the end of June 2021, a reduction from CN¥3.26b over a year. However, its balance sheet shows it holds CN¥3.62b in cash, so it actually has CN¥1.38b net cash.

How Healthy Is United Laboratories International Holdings' Balance Sheet?

The latest balance sheet data shows that United Laboratories International Holdings had liabilities of CN¥5.64b due within a year, and liabilities of CN¥1.12b falling due after that. Offsetting this, it had CN¥3.62b in cash and CN¥3.52b in receivables that were due within 12 months. So it actually has CN¥381.6m more liquid assets than total liabilities.

This surplus suggests that United Laboratories International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, United Laboratories International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that United Laboratories International Holdings grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if United Laboratories International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While United Laboratories International 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, United Laboratories International Holdings recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that United Laboratories International Holdings has net cash of CN¥1.38b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.0b, being 98% of its EBIT. So we don't think United Laboratories International Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with United Laboratories International Holdings , and understanding them should be part of your investment process.

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.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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