Does Magnus Concordia Group (HKG:1172) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Magnus Concordia Group Limited (HKG:1172) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Magnus Concordia Group

What Is Magnus Concordia Group's Net Debt?

The image below, which you can click on for greater detail, shows that Magnus Concordia Group had debt of HK$175.3m at the end of March 2022, a reduction from HK$219.1m over a year. However, it does have HK$201.0m in cash offsetting this, leading to net cash of HK$25.7m.

How Healthy Is Magnus Concordia Group's Balance Sheet?

According to the last reported balance sheet, Magnus Concordia Group had liabilities of HK$828.4m due within 12 months, and liabilities of HK$47.5m due beyond 12 months. Offsetting this, it had HK$201.0m in cash and HK$78.6m in receivables that were due within 12 months. So its liabilities total HK$596.3m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's HK$485.5m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Magnus Concordia Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is Magnus Concordia 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.

Over 12 months, Magnus Concordia Group made a loss at the EBIT level, and saw its revenue drop to HK$1.6b, which is a fall of 26%. To be frank that doesn't bode well.

So How Risky Is Magnus Concordia Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Magnus Concordia Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$17m of cash and made a loss of HK$270m. With only HK$25.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should learn about the 3 warning signs we've spotted with Magnus Concordia Group (including 2 which make us uncomfortable) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.