Is Miko International Holdings (HKG:1247) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Miko International Holdings Limited (HKG:1247) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Miko International Holdings

What Is Miko International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Miko International Holdings had CN¥17.0m of debt in December 2023, down from CN¥32.0m, one year before. However, it does have CN¥39.7m in cash offsetting this, leading to net cash of CN¥22.7m.

How Strong Is Miko International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Miko International Holdings had liabilities of CN¥73.4m due within 12 months and liabilities of CN¥1.30m due beyond that. Offsetting these obligations, it had cash of CN¥39.7m as well as receivables valued at CN¥93.9m due within 12 months. So it can boast CN¥58.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Miko International Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Miko International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Miko International 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.

Over 12 months, Miko International Holdings reported revenue of CN¥151m, which is a gain of 5.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Miko International Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Miko International Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥4.6m of cash and made a loss of CN¥13m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥22.7m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 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.