M&L Holdings Group (HKG:8152) Is Making Moderate Use Of Debt

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.' 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. Importantly, M&L Holdings Group Limited (HKG:8152) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for M&L Holdings Group

How Much Debt Does M&L Holdings Group Carry?

As you can see below, M&L Holdings Group had HK$27.0m of debt at December 2020, down from HK$29.0m a year prior. On the flip side, it has HK$21.1m in cash leading to net debt of about HK$5.94m.

A Look At M&L Holdings Group's Liabilities

The latest balance sheet data shows that M&L Holdings Group had liabilities of HK$91.9m due within a year, and liabilities of HK$5.47m falling due after that. On the other hand, it had cash of HK$21.1m and HK$103.4m worth of receivables due within a year. So it actually has HK$27.1m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

Over 12 months, M&L Holdings Group made a loss at the EBIT level, and saw its revenue drop to HK$71m, which is a fall of 50%. To be frank that doesn't bode well.

Caveat Emptor

While M&L Holdings Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$10m. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. Be aware that M&L Holdings Group is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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