United U-LI Corporation Berhad (KLSE:ULICORP) Has A Rock Solid 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. As with many other companies United U-LI Corporation Berhad (KLSE:ULICORP) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 U-LI Corporation Berhad

How Much Debt Does United U-LI Corporation Berhad Carry?

As you can see below, at the end of March 2024, United U-LI Corporation Berhad had RM25.9m of debt, up from RM18.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM146.6m in cash, so it actually has RM120.7m net cash.

How Healthy Is United U-LI Corporation Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that United U-LI Corporation Berhad had liabilities of RM48.1m due within 12 months and liabilities of RM3.13m due beyond that. On the other hand, it had cash of RM146.6m and RM101.6m worth of receivables due within a year. So it can boast RM197.0m more liquid assets than total liabilities.

This luscious liquidity implies that United U-LI Corporation Berhad's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, United U-LI Corporation Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, United U-LI Corporation Berhad grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. 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 United U-LI Corporation Berhad'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While United U-LI Corporation Berhad 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 U-LI Corporation Berhad recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that United U-LI Corporation Berhad has net cash of RM120.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 34% over the last year. The bottom line is that we do not find United U-LI Corporation Berhad's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for United U-LI Corporation Berhad that you should be aware of.

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.