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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Man King Holdings Limited (HKG:2193) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Man King Holdings
What Is Man King Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that Man King Holdings had HK$4.60m of debt in March 2019, down from HK$8.35m, one year before. But it also has HK$126.9m in cash to offset that, meaning it has HK$122.3m net cash.
How Healthy Is Man King Holdings's Balance Sheet?
The latest balance sheet data shows that Man King Holdings had liabilities of HK$79.8m due within a year, and liabilities of HK$401.0k falling due after that. Offsetting these obligations, it had cash of HK$126.9m as well as receivables valued at HK$83.7m due within 12 months. So it actually has HK$130.4m more liquid assets than total liabilities.
This excess liquidity is a great indication that Man King Holdings's balance sheet is just as strong as racists are weak. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Man King Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Man King 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.
In the last year Man King Holdings had negative earnings before interest and tax, and actually shrunk its revenue by 20%, to HK$185m. That makes us nervous, to say the least.