Man Shing Global Holdings (HKG:8309) Could Easily Take On More Debt

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 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 Man Shing Global Holdings Limited (HKG:8309) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Man Shing Global Holdings

What Is Man Shing Global Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Man Shing Global Holdings had HK$84.2m of debt, an increase on HK$24.7m, over one year. But on the other hand it also has HK$94.2m in cash, leading to a HK$10.0m net cash position.

How Healthy Is Man Shing Global Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Man Shing Global Holdings had liabilities of HK$188.6m due within 12 months and liabilities of HK$65.1m due beyond that. Offsetting this, it had HK$94.2m in cash and HK$147.4m in receivables that were due within 12 months. So it has liabilities totalling HK$12.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Man Shing Global Holdings is worth HK$52.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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!

Notably, Man Shing Global Holdings's EBIT launched higher than Elon Musk, gaining a whopping 245% on last year. 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 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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$10.0m. And it impressed us with free cash flow of HK$75m, being 132% of its EBIT. So we don't think Man Shing Global Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Man Shing Global Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.