Yahoo Finance Does United Strength Power Holdings (HKG:2337) Have A Healthy Balance Sheet?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, United Strength Power Holdings Limited (HKG:2337) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for United Strength Power Holdings
What Is United Strength Power Holdings's Debt?
As you can see below, at the end of June 2019, United Strength Power Holdings had CN¥68.5m of debt, up from CN¥15.0m a year ago. Click the image for more detail. But it also has CN¥158.3m in cash to offset that, meaning it has CN¥89.8m net cash.
How Strong Is United Strength Power Holdings's Balance Sheet?
According to the last reported balance sheet, United Strength Power Holdings had liabilities of CN¥85.9m due within 12 months, and liabilities of CN¥80.3m due beyond 12 months. On the other hand, it had cash of CN¥158.3m and CN¥18.2m worth of receivables due within a year. So it actually has CN¥10.3m more liquid assets than total liabilities.
Having regard to United Strength Power Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥1.32b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, United Strength Power Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, United Strength Power Holdings grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is United Strength Power Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While United Strength Power 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 Strength Power Holdings's free cash flow amounted to 50% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While it is always sensible to investigate a company's debt, in this case United Strength Power Holdings has CN¥89.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 46% year-on-year EBIT growth. So we don't think United Strength Power Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for United Strength Power Holdings that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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