Is Miko International Holdings (HKG:1247) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Miko International Holdings Limited (HKG:1247) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Miko International Holdings

How Much Debt Does Miko International Holdings Carry?

As you can see below, Miko International Holdings had CN¥34.4m of debt at June 2022, down from CN¥56.6m a year prior. However, it does have CN¥55.5m in cash offsetting this, leading to net cash of CN¥21.1m.

How Healthy Is Miko International Holdings' Balance Sheet?

The latest balance sheet data shows that Miko International Holdings had liabilities of CN¥98.2m due within a year, and liabilities of CN¥1.30m falling due after that. Offsetting this, it had CN¥55.5m in cash and CN¥49.3m in receivables that were due within 12 months. So it can boast CN¥5.23m more liquid assets than total liabilities.

This surplus suggests that Miko International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Miko International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 made a loss at the EBIT level, and saw its revenue drop to CN¥123m, which is a fall of 7.2%. We would much prefer see growth.

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. And over the same period it saw negative free cash outflow of CN¥18m and booked a CN¥17m accounting loss. With only CN¥21.1m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Miko International Holdings is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.