Stock Analysis

Health Check: How Prudently Does Miko International Holdings (HKG:1247) Use Debt?

SEHK:1247
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Miko International Holdings Limited (HKG:1247) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Miko International Holdings

How Much Debt Does Miko International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Miko International Holdings had CN¥17.0m of debt in June 2023, down from CN¥34.4m, one year before. But on the other hand it also has CN¥101.2m in cash, leading to a CN¥84.2m net cash position.

debt-equity-history-analysis
SEHK:1247 Debt to Equity History August 31st 2023

How Healthy Is Miko International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Miko International Holdings had liabilities of CN¥83.5m falling due within a year, and liabilities of CN¥1.30m due beyond that. On the other hand, it had cash of CN¥101.2m and CN¥56.0m worth of receivables due within a year. So it can boast CN¥72.4m more liquid assets than total liabilities.

This surplus strongly suggests that Miko International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Miko International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Miko International 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.

In the last year Miko International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 27%, to CN¥156m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Miko International Holdings?

While Miko International Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥2.1m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given it also grew revenue by 27% over the last year, we think there's a good chance the company is on track. So this may well be an interesting business to watch grow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with Miko International Holdings .

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.