Man Shing Global Holdings (HKG:8309) Has A Rock Solid 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Man Shing Global Holdings Limited (HKG:8309) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Man Shing Global Holdings

What Is Man Shing Global Holdings's Net Debt?

As you can see below, Man Shing Global Holdings had HK$37.3m of debt at September 2020, down from HK$57.2m a year prior. But on the other hand it also has HK$57.3m in cash, leading to a HK$20.0m net cash position.

How Healthy Is Man Shing Global Holdings's Balance Sheet?

According to the last reported balance sheet, Man Shing Global Holdings had liabilities of HK$107.2m due within 12 months, and liabilities of HK$11.0m due beyond 12 months. Offsetting this, it had HK$57.3m in cash and HK$79.2m in receivables that were due within 12 months. So it actually has HK$18.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Man Shing Global Holdings's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. 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.

Even more impressive was the fact that Man Shing Global Holdings grew its EBIT by 375% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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 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. During the last three years, Man Shing Global Holdings produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Man Shing Global Holdings has HK$20.0m in net cash and a decent-looking balance sheet. And we liked the look of last year's 375% year-on-year EBIT growth. The bottom line is that we do not find Man Shing Global Holdings's debt levels at all concerning. 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. For instance, we've identified 2 warning signs for Man Shing Global Holdings (1 is concerning) you should be aware of.

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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