Is Miji International Holdings (HKG:1715) Using Too Much Debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Miji International Holdings Limited (HKG:1715) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Miji International Holdings
What Is Miji International Holdings's Debt?
As you can see below, Miji International Holdings had CN¥41.6m of debt, at December 2018, which is about the same the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥82.0m in cash, so it actually has CN¥40.4m net cash.
A Look At Miji International Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that Miji International Holdings had liabilities of CN¥93.3m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of CN¥82.0m and CN¥72.3m worth of receivables due within a year. So it actually has CN¥60.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Miji International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Miji International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Miji International Holdings's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Miji International 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Miji 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, Miji International Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While it is always sensible to investigate a company's debt, in this case Miji International Holdings has CN¥40m in net cash and a decent-looking balance sheet. So we are not troubled with Miji International Holdings's debt use. We'd be motivated to research the stock further if we found out that Miji International Holdings insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. Thank you for reading.
