Is Macau E&M Holding (HKG:1408) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Macau E&M Holding Limited (HKG:1408) does carry debt. But is this debt a concern to shareholders?

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 Macau E&M Holding

How Much Debt Does Macau E&M Holding Carry?

The chart below, which you can click on for greater detail, shows that Macau E&M Holding had MO$12.6m in debt in June 2024; about the same as the year before. However, it does have MO$130.1m in cash offsetting this, leading to net cash of MO$117.5m.

How Strong Is Macau E&M Holding's Balance Sheet?

We can see from the most recent balance sheet that Macau E&M Holding had liabilities of MO$32.4m falling due within a year, and liabilities of MO$12.1m due beyond that. Offsetting this, it had MO$130.1m in cash and MO$75.4m in receivables that were due within 12 months. So it actually has MO$161.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Macau E&M Holding's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Macau E&M Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Macau E&M Holding'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.

Over 12 months, Macau E&M Holding made a loss at the EBIT level, and saw its revenue drop to MO$117m, which is a fall of 5.3%. That's not what we would hope to see.

So How Risky Is Macau E&M Holding?

Although Macau E&M Holding had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of MO$7.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Macau E&M Holding .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.