Is China Unicom (Hong Kong) (HKG:762) A Risky Investment?

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.' 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 China Unicom (Hong Kong) Limited (HKG:762) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Unicom (Hong Kong)

What Is China Unicom (Hong Kong)'s Debt?

You can click the graphic below for the historical numbers, but it shows that China Unicom (Hong Kong) had CN¥3.04b of debt in June 2024, down from CN¥8.53b, one year before. But on the other hand it also has CN¥79.5b in cash, leading to a CN¥76.4b net cash position.

A Look At China Unicom (Hong Kong)'s Liabilities

According to the last reported balance sheet, China Unicom (Hong Kong) had liabilities of CN¥263.9b due within 12 months, and liabilities of CN¥39.8b due beyond 12 months. Offsetting these obligations, it had cash of CN¥79.5b as well as receivables valued at CN¥69.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥154.7b.

This is a mountain of leverage even relative to its gargantuan market capitalization of CN¥181.7b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, China Unicom (Hong Kong) boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, China Unicom (Hong Kong) grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if China Unicom (Hong Kong) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. China Unicom (Hong Kong) 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 three years, China Unicom (Hong Kong) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although China Unicom (Hong Kong)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥76.4b. The cherry on top was that in converted 156% of that EBIT to free cash flow, bringing in CN¥23b. So we don't have any problem with China Unicom (Hong Kong)'s use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for China Unicom (Hong Kong) you should be aware of.

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.