We Think MYS Group (SZSE:002303) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies MYS Group Co., Ltd. (SZSE:002303) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MYS Group

What Is MYS Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 MYS Group had CN¥1.23b of debt, an increase on CN¥1.09b, over one year. But on the other hand it also has CN¥1.82b in cash, leading to a CN¥589.6m net cash position.

How Healthy Is MYS Group's Balance Sheet?

According to the last reported balance sheet, MYS Group had liabilities of CN¥2.43b due within 12 months, and liabilities of CN¥367.3m due beyond 12 months. On the other hand, it had cash of CN¥1.82b and CN¥1.28b worth of receivables due within a year. So it actually has CN¥299.9m more liquid assets than total liabilities.

This short term liquidity is a sign that MYS Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that MYS Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that MYS Group grew its EBIT by 108% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MYS Group'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. MYS Group 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. Over the last three years, MYS Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case MYS Group has CN¥589.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥424m, being 171% of its EBIT. So is MYS Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with MYS Group , and understanding them should be part of your investment process.

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.