United Laboratories International Holdings (HKG:3933) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies The United Laboratories International Holdings Limited (HKG:3933) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for United Laboratories International Holdings

What Is United Laboratories International Holdings's Net Debt?

As you can see below, United Laboratories International Holdings had CN¥1.52b of debt at June 2023, down from CN¥2.14b a year prior. But on the other hand it also has CN¥4.77b in cash, leading to a CN¥3.25b net cash position.

How Healthy Is United Laboratories International Holdings' Balance Sheet?

According to the last reported balance sheet, United Laboratories International Holdings had liabilities of CN¥7.06b due within 12 months, and liabilities of CN¥1.17b due beyond 12 months. On the other hand, it had cash of CN¥4.77b and CN¥5.58b worth of receivables due within a year. So it can boast CN¥2.11b more liquid assets than total liabilities.

It's good to see that United Laboratories International Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that United Laboratories International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, United Laboratories International Holdings grew its EBIT by 86% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. United Laboratories International 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 most recent three years, United Laboratories International Holdings recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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¥3.25b, as well as more liquid assets than liabilities. And we liked the look of last year's 86% year-on-year EBIT growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for United Laboratories International Holdings (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.