Does Uni-President Enterprises (TPE:1216) 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.' 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 Uni-President Enterprises Corp. (TPE:1216) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Uni-President Enterprises

How Much Debt Does Uni-President Enterprises Carry?

As you can see below, Uni-President Enterprises had NT$102.3b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have NT$104.9b in cash offsetting this, leading to net cash of NT$2.67b.

A Look At Uni-President Enterprises' Liabilities

The latest balance sheet data shows that Uni-President Enterprises had liabilities of NT$174.7b due within a year, and liabilities of NT$141.1b falling due after that. Offsetting this, it had NT$104.9b in cash and NT$25.6b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$185.2b.

While this might seem like a lot, it is not so bad since Uni-President Enterprises has a huge market capitalization of NT$384.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Uni-President Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

While Uni-President Enterprises doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Uni-President Enterprises can strengthen its balance sheet over time. 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. Uni-President Enterprises 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, Uni-President Enterprises actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Uni-President Enterprises's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of NT$2.67b. The cherry on top was that in converted 145% of that EBIT to free cash flow, bringing in NT$46b. So we are not troubled with Uni-President Enterprises's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Uni-President Enterprises that 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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