Here's Why M&L Holdings Group (HKG:8152) Can Afford Some Debt

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.' 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. Importantly, M&L Holdings Group Limited (HKG:8152) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for M&L Holdings Group

How Much Debt Does M&L Holdings Group Carry?

The image below, which you can click on for greater detail, shows that at June 2021 M&L Holdings Group had debt of HK$34.8m, up from HK$29.0m in one year. However, because it has a cash reserve of HK$30.2m, its net debt is less, at about HK$4.61m.

A Look At M&L Holdings Group's Liabilities

According to the last reported balance sheet, M&L Holdings Group had liabilities of HK$92.3m due within 12 months, and liabilities of HK$4.27m due beyond 12 months. Offsetting this, it had HK$30.2m in cash and HK$87.7m in receivables that were due within 12 months. So it can boast HK$21.3m more liquid assets than total liabilities.

This surplus strongly suggests that M&L Holdings Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since M&L Holdings Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, M&L Holdings Group made a loss at the EBIT level, and saw its revenue drop to HK$76m, which is a fall of 26%. That makes us nervous, to say the least.

Caveat Emptor

Not only did M&L Holdings Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$8.8m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example M&L Holdings Group has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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