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. We can see that The United Laboratories International Holdings Limited (HKG:3933) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does United Laboratories International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 United Laboratories International Holdings had CN¥2.44b of debt, an increase on CN¥1.52b, over one year. However, it does have CN¥6.55b in cash offsetting this, leading to net cash of CN¥4.12b.

How Healthy Is United Laboratories International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that United Laboratories International Holdings had liabilities of CN¥7.41b due within 12 months and liabilities of CN¥1.84b due beyond that. Offsetting this, it had CN¥6.55b in cash and CN¥5.45b in receivables that were due within 12 months. So it actually has CN¥2.75b 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. Simply put, the fact that United Laboratories International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that United Laboratories International Holdings has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. United Laboratories International Holdings 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. During the last three years, United Laboratories International Holdings produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case United Laboratories International Holdings has CN¥4.12b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So we don't think United Laboratories International Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for United Laboratories International Holdings that you should be aware of.

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.

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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.