Does Man Shing Global Holdings (HKG:8309) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Man Shing Global Holdings Limited (HKG:8309) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Man Shing Global Holdings

What Is Man Shing Global Holdings's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Man Shing Global Holdings had debt of HK$75.7m, up from HK$17.3m in one year. However, it does have HK$81.3m in cash offsetting this, leading to net cash of HK$5.59m.

How Strong Is Man Shing Global Holdings' Balance Sheet?

According to the last reported balance sheet, Man Shing Global Holdings had liabilities of HK$164.6m due within 12 months, and liabilities of HK$39.1m due beyond 12 months. On the other hand, it had cash of HK$81.3m and HK$89.4m worth of receivables due within a year. So it has liabilities totalling HK$33.1m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Man Shing Global Holdings has a market capitalization of HK$55.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Man Shing Global Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Man Shing Global Holdings's EBIT fell a jaw-dropping 55% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Man Shing Global Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Man Shing Global Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Man Shing Global Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Man Shing Global Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$5.59m. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in -HK$6.1m. So while Man Shing Global Holdings does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Man Shing Global Holdings has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.