Here's Why Man Shing Global Holdings (HKG:8309) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Man Shing Global Holdings Limited (HKG:8309) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Man Shing Global Holdings

How Much Debt Does Man Shing Global Holdings Carry?

The image below, which you can click on for greater detail, shows that Man Shing Global Holdings had debt of HK$39.3m at the end of September 2024, a reduction from HK$54.2m over a year. However, its balance sheet shows it holds HK$113.6m in cash, so it actually has HK$74.3m net cash.

How Strong Is Man Shing Global Holdings' Balance Sheet?

The latest balance sheet data shows that Man Shing Global Holdings had liabilities of HK$177.3m due within a year, and liabilities of HK$48.8m falling due after that. On the other hand, it had cash of HK$113.6m and HK$115.9m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This short term liquidity is a sign that Man Shing Global Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Man Shing Global Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Man Shing Global Holdings's EBIT fell a jaw-dropping 24% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 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. 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. Over the last three years, Man Shing Global Holdings 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 we empathize with investors who find debt concerning, you should keep in mind that Man Shing Global Holdings has net cash of HK$74.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$53m, being 335% of its EBIT. So we don't have any problem with Man Shing Global Holdings's use of debt. 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. Be aware that Man Shing Global Holdings is showing 1 warning sign 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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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.