Is M&L Holdings Group (HKG:8152) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that M&L Holdings Group Limited (HKG:8152) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

See 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 M&L Holdings Group had debt of HK$23.3m at the end of June 2024, a reduction from HK$34.6m over a year. However, its balance sheet shows it holds HK$29.0m in cash, so it actually has HK$5.71m net cash.

How Healthy Is M&L Holdings Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that M&L Holdings Group had liabilities of HK$60.9m due within 12 months and liabilities of HK$6.86m due beyond that. On the other hand, it had cash of HK$29.0m and HK$58.2m worth of receivables due within a year. So it actually has HK$19.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that M&L Holdings Group's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that M&L Holdings Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that M&L Holdings Group's EBIT was down 76% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since M&L Holdings Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. M&L Holdings 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 two years, M&L Holdings 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 M&L Holdings Group has HK$5.71m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 229% of that EBIT to free cash flow, bringing in HK$14m. So we don't have any problem with M&L Holdings Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for M&L Holdings Group you should be aware of, and 1 of them can't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.