Is Uni-Bio Science Group (HKG:690) Using Too Much 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.' 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. We can see that Uni-Bio Science Group Limited (HKG:690) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Uni-Bio Science Group

What Is Uni-Bio Science Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Uni-Bio Science Group had debt of HK$45.4m, up from HK$11.3m in one year. But on the other hand it also has HK$142.2m in cash, leading to a HK$96.8m net cash position.

How Healthy Is Uni-Bio Science Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Uni-Bio Science Group had liabilities of HK$114.8m due within 12 months and liabilities of HK$38.0m due beyond that. Offsetting these obligations, it had cash of HK$142.2m as well as receivables valued at HK$59.5m due within 12 months. So it can boast HK$48.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Uni-Bio Science Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Uni-Bio Science Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Uni-Bio Science Group has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Uni-Bio Science Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Uni-Bio Science Group 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 two years, Uni-Bio Science Group reported free cash flow worth 16% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Uni-Bio Science Group has HK$96.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 72% year-on-year EBIT growth. So is Uni-Bio Science Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Uni-Bio Science Group .

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. 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.