Does United Strength Power Holdings (HKG:2337) Have A Healthy 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. Importantly, United Strength Power Holdings Limited (HKG:2337) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for United Strength Power Holdings

What Is United Strength Power Holdings's Debt?

As you can see below, United Strength Power Holdings had CN¥67.3m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥135.3m in cash to offset that, meaning it has CN¥68.0m net cash.

How Strong Is United Strength Power Holdings's Balance Sheet?

The latest balance sheet data shows that United Strength Power Holdings had liabilities of CN¥125.2m due within a year, and liabilities of CN¥38.9m falling due after that. Offsetting this, it had CN¥135.3m in cash and CN¥10.2m in receivables that were due within 12 months. So it has liabilities totalling CN¥18.6m more than its cash and near-term receivables, combined.

This state of affairs indicates that United Strength Power Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥2.85b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, United Strength Power Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, United Strength Power Holdings's EBIT fell a jaw-dropping 32% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is United Strength Power 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 company can only pay off debt with cold hard cash, not accounting profits. While United Strength Power 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 Strength Power Holdings recorded free cash flow worth 51% 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 it is always sensible to look at a company's total liabilities, it is very reassuring that United Strength Power Holdings has CN¥68.0m in net cash. So we are not troubled with United Strength Power Holdings's debt use. 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. Case in point: We've spotted 3 warning signs for United Strength Power Holdings you should be aware of, and 1 of them is a bit unpleasant.

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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