Is Magnus Concordia Group (HKG:1172) A Risky Investment?

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.' 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, Magnus Concordia Group Limited (HKG:1172) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Magnus Concordia Group

How Much Debt Does Magnus Concordia Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Magnus Concordia Group had HK$188.8m of debt, an increase on HK$175.3m, over one year. However, because it has a cash reserve of HK$68.6m, its net debt is less, at about HK$120.2m.

How Healthy Is Magnus Concordia Group's Balance Sheet?

The latest balance sheet data shows that Magnus Concordia Group had liabilities of HK$676.8m due within a year, and liabilities of HK$61.6m falling due after that. Offsetting these obligations, it had cash of HK$68.6m as well as receivables valued at HK$52.4m due within 12 months. So it has liabilities totalling HK$617.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$306.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Magnus Concordia Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Magnus Concordia 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.

In the last year Magnus Concordia Group had a loss before interest and tax, and actually shrunk its revenue by 74%, to HK$417m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Magnus Concordia 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$356m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of HK$35m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. We've identified 3 warning signs with Magnus Concordia Group (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.