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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 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 June 2024 Uni-Bio Science Group had debt of HK$82.8m, up from HK$11.0m in one year. But on the other hand it also has HK$179.0m in cash, leading to a HK$96.2m net cash position.

A Look At Uni-Bio Science Group's Liabilities

The latest balance sheet data shows that Uni-Bio Science Group had liabilities of HK$118.3m due within a year, and liabilities of HK$56.1m falling due after that. On the other hand, it had cash of HK$179.0m and HK$77.2m worth of receivables due within a year. So it can boast HK$81.8m more liquid assets than total liabilities.

This excess liquidity suggests that Uni-Bio Science Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. 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.

On top of that, Uni-Bio Science Group grew its EBIT by 49% 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 it is Uni-Bio Science Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Uni-Bio Science Group 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. In the last three years, Uni-Bio Science Group's free cash flow amounted to 40% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Uni-Bio Science Group has net cash of HK$96.2m, as well as more liquid assets than liabilities. And we liked the look of last year's 49% year-on-year EBIT growth. So we don't think Uni-Bio Science Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Uni-Bio Science Group you should be aware of, and 1 of them is concerning.

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.