United Laboratories International Holdings (HKG:3933) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 The United Laboratories International Holdings Limited (HKG:3933) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 United Laboratories International Holdings

What Is United Laboratories International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that United Laboratories International Holdings had CN¥2.14b of debt in June 2022, down from CN¥2.25b, one year before. However, its balance sheet shows it holds CN¥4.04b in cash, so it actually has CN¥1.90b net cash.

A Look At United Laboratories International Holdings' Liabilities

The latest balance sheet data shows that United Laboratories International Holdings had liabilities of CN¥6.87b due within a year, and liabilities of CN¥739.2m falling due after that. Offsetting these obligations, it had cash of CN¥4.04b as well as receivables valued at CN¥4.08b due within 12 months. So it can boast CN¥510.5m 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. 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.

While United Laboratories International Holdings doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine United Laboratories International Holdings's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 most recent three years, United Laboratories International Holdings recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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¥1.90b, as well as more liquid assets than liabilities. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in CN¥882m. So we don't think United Laboratories International Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with United Laboratories International Holdings .

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.