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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Ming Fai International Holdings Limited (HKG:3828) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Ming Fai International Holdings
What Is Ming Fai International Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 Ming Fai International Holdings had HK$50.1m of debt, an increase on HK$36.7m, over one year. But it also has HK$275.8m in cash to offset that, meaning it has HK$225.7m net cash.
A Look At Ming Fai International Holdings's Liabilities
The latest balance sheet data shows that Ming Fai International Holdings had liabilities of HK$604.2m due within a year, and liabilities of HK$10.3m falling due after that. Offsetting these obligations, it had cash of HK$275.8m as well as receivables valued at HK$683.0m due within 12 months. So it can boast HK$344.2m more liquid assets than total liabilities.
This surplus strongly suggests that Ming Fai International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Ming Fai International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Ming Fai International Holdings's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ming Fai International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.