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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, The United Laboratories International Holdings Limited (HKG:3933) does carry debt. But should shareholders be worried about its use of debt?
We've discovered 2 warning signs about United Laboratories International Holdings. View them for free.What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is United Laboratories International Holdings's Debt?
As you can see below, at the end of December 2024, United Laboratories International Holdings had CN¥3.14b of debt, up from CN¥1.50b a year ago. Click the image for more detail. But it also has CN¥6.33b in cash to offset that, meaning it has CN¥3.19b net cash.
How Strong Is United Laboratories International Holdings' Balance Sheet?
The latest balance sheet data shows that United Laboratories International Holdings had liabilities of CN¥8.77b due within a year, and liabilities of CN¥2.63b falling due after that. Offsetting these obligations, it had cash of CN¥6.33b as well as receivables valued at CN¥6.27b due within 12 months. So it can boast CN¥1.20b more liquid assets than total liabilities.
This surplus suggests that United Laboratories International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, United Laboratories International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
View our latest analysis for United Laboratories International Holdings
On the other hand, United Laboratories International Holdings's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if United Laboratories International Holdings 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. While United Laboratories International 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. In the last three years, United Laboratories International Holdings's free cash flow amounted to 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that United Laboratories International Holdings has net cash of CN¥3.19b, as well as more liquid assets than liabilities. So we are not troubled with United Laboratories International 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. For example, we've discovered 2 warning signs for United Laboratories International Holdings that you should be aware of before investing here.
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.