Uniphar (ISE:UPR) seems to be using debt quite wisely

Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Uniphar plc (ISE:UPR) uses debt in its business. But the real question is whether this debt makes the business risky.

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Uniphar

What is Uniphar’s net debt?

As you can see below, at the end of December 2021, Uniphar had a debt of 126.3 million euros, compared to 97.9 million euros a year ago. Click on the image for more details. However, he also had €78.0 million in cash, so his net debt is €48.3 million.

ISE: UPR Debt to Equity History April 2, 2022

How healthy is Uniphar’s balance sheet?

The latest balance sheet data shows that Uniphar had liabilities of €373.7 million due within one year and liabilities of €319.7 million falling due thereafter. On the other hand, it had €78.0 million in cash and €152.1 million in receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by €463.3 million.

While that might sound like a lot, it’s not too bad since Uniphar has a market cap of €1.07 billion, so it could probably bolster its balance sheet by raising capital if needed. But we definitely want to keep our eyes peeled for indications that its debt is too risky.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Uniphar has a net debt of just 0.72 times EBITDA, indicating that it is certainly not an imprudent borrower. And this view is supported by strong interest coverage, with EBIT amounting to 8.3 times interest expense over the past year. Another good sign, Uniphar was able to increase its EBIT by 22% in twelve months, thus facilitating the repayment of its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Uniphar’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, while the taxman may love accounting profits, lenders only accept cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Fortunately for all shareholders, Uniphar has actually produced more free cash flow than EBIT over the past three years. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

Uniphar’s conversion of EBIT to free cash flow suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an under-14 goalkeeper. But, on a darker note, we’re a bit concerned about his total passive level. We also note that healthcare companies like Uniphar routinely use debt without issue. Overall, we think Uniphar’s use of debt seems entirely reasonable and we are not worried about that. Although debt carries risks, when used wisely, it can also generate a higher return on equity. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 1 warning sign for Uniphar which you should be aware of before investing here.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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