Here's Why Man Shing Global Holdings (HKG:8309) Has A Meaningful Debt Burden

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.' 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. Importantly, Man Shing Global Holdings Limited (HKG:8309) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Man Shing Global Holdings

How Much Debt Does Man Shing Global Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Man Shing Global Holdings had HK$24.7m of debt in September 2021, down from HK$37.3m, one year before. But on the other hand it also has HK$29.4m in cash, leading to a HK$4.72m net cash position.

How Strong Is Man Shing Global Holdings' Balance Sheet?

The latest balance sheet data shows that Man Shing Global Holdings had liabilities of HK$93.2m due within a year, and liabilities of HK$10.7m falling due after that. Offsetting these obligations, it had cash of HK$29.4m as well as receivables valued at HK$72.6m due within 12 months. So these liquid assets roughly match the total liabilities.

Given Man Shing Global Holdings has a market capitalization of HK$65.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

Shareholders should be aware that Man Shing Global Holdings's EBIT was down 73% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is Man Shing Global Holdings'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Man Shing Global Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Man Shing Global Holdings created free cash flow amounting to 3.8% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

We could understand if investors are concerned about Man Shing Global Holdings's liabilities, but we can be reassured by the fact it has has net cash of HK$4.72m. So while Man Shing Global Holdings does not have a great balance sheet, it's certainly not too bad. 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 5 warning signs we've spotted with Man Shing Global Holdings (including 2 which don't sit too well with us) .

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.