Is Uni-Bio Science Group (HKG:690) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Uni-Bio Science Group Limited (HKG:690) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Uni-Bio Science Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Uni-Bio Science Group had HK$104.6m of debt, an increase on HK$50.5m, over one year. But on the other hand it also has HK$183.9m in cash, leading to a HK$79.3m net cash position.

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

The latest balance sheet data shows that Uni-Bio Science Group had liabilities of HK$123.5m due within a year, and liabilities of HK$68.4m falling due after that. Offsetting this, it had HK$183.9m in cash and HK$101.1m in receivables that were due within 12 months. So it actually has HK$93.1m 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.

See our latest analysis for Uni-Bio Science Group

Another good sign is that Uni-Bio Science Group has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 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. Looking at the most recent three years, Uni-Bio Science Group recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Uni-Bio Science Group has HK$79.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 26% over the last year. So we don't think Uni-Bio Science Group'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. For example, we've discovered 3 warning signs for Uni-Bio Science Group (1 can't be ignored!) that you should be aware of before investing here.

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.