We Think Union Medical Healthcare (HKG:2138) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Union Medical Healthcare Limited (HKG:2138) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Union Medical Healthcare

How Much Debt Does Union Medical Healthcare Carry?

The image below, which you can click on for greater detail, shows that Union Medical Healthcare had debt of HK$130.3m at the end of September 2019, a reduction from HK$545.9m over a year. However, its balance sheet shows it holds HK$540.9m in cash, so it actually has HK$410.6m net cash.

How Healthy Is Union Medical Healthcare's Balance Sheet?

The latest balance sheet data shows that Union Medical Healthcare had liabilities of HK$944.0m due within a year, and liabilities of HK$362.7m falling due after that. Offsetting this, it had HK$540.9m in cash and HK$202.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$563.5m.

Given Union Medical Healthcare has a market capitalization of HK$4.94b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Union Medical Healthcare also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Union Medical Healthcare grew its EBIT by 8.8% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Union Medical Healthcare's ability to maintain a healthy balance sheet going forward. 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 company can only pay off debt with cold hard cash, not accounting profits. While Union Medical Healthcare 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, Union Medical Healthcare's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although Union Medical Healthcare's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$410.6m. On top of that, it increased its EBIT by 8.8% in the last twelve months. So we are not troubled with Union Medical Healthcare's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Union Medical Healthcare (at least 1 which is significant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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