These 4 Measures Indicate That China Unicom (Hong Kong) (HKG:762) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies China Unicom (Hong Kong) Limited (HKG:762) makes use of debt. But should shareholders be worried about its use of debt?

We've discovered 1 warning sign about China Unicom (Hong Kong). View them for free.

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does China Unicom (Hong Kong) Carry?

As you can see below, China Unicom (Hong Kong) had CN¥40.7b of debt at December 2024, down from CN¥46.4b a year prior. However, its balance sheet shows it holds CN¥63.9b in cash, so it actually has CN¥23.1b net cash.

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

The latest balance sheet data shows that China Unicom (Hong Kong) had liabilities of CN¥270.7b due within a year, and liabilities of CN¥37.0b falling due after that. On the other hand, it had cash of CN¥63.9b and CN¥80.3b worth of receivables due within a year. So its liabilities total CN¥163.5b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its very significant market capitalization of CN¥249.8b, so it does suggest shareholders should keep an eye on China Unicom (Hong Kong)'s use of debt. 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!

Check out our latest analysis for China Unicom (Hong Kong)

The good news is that China Unicom (Hong Kong) has increased its EBIT by 3.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China Unicom (Hong Kong)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, China Unicom (Hong Kong) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While China Unicom (Hong Kong) does have more liabilities than liquid assets, it also has net cash of CN¥23.1b. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in CN¥14b. So we don't have any problem with China Unicom (Hong Kong)'s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for China Unicom (Hong Kong) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.