These 4 Measures Indicate That UNQ Holdings (HKG:2177) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 UNQ Holdings Limited (HKG:2177) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 think about a company's use of debt, we first look at cash and debt together.

What Is UNQ Holdings's Net Debt?

As you can see below, at the end of June 2025, UNQ Holdings had CN¥223.4m of debt, up from CN¥156.1m a year ago. Click the image for more detail. But it also has CN¥364.7m in cash to offset that, meaning it has CN¥141.3m net cash.

How Healthy Is UNQ Holdings' Balance Sheet?

According to the last reported balance sheet, UNQ Holdings had liabilities of CN¥413.2m due within 12 months, and liabilities of CN¥27.6m due beyond 12 months. On the other hand, it had cash of CN¥364.7m and CN¥270.2m worth of receivables due within a year. So it actually has CN¥194.2m more liquid assets than total liabilities.

This surplus liquidity suggests that UNQ Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that UNQ Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for UNQ Holdings

Better yet, UNQ Holdings grew its EBIT by 429% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is UNQ Holdings'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. UNQ 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. Happily for any shareholders, UNQ Holdings actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case UNQ Holdings has CN¥141.3m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 675% of that EBIT to free cash flow, bringing in -CN¥7.3m. At the end of the day we're not concerned about UNQ Holdings's debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example UNQ Holdings has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.