Miko International Holdings (HKG:1247) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Miko International Holdings Limited (HKG:1247) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Miko International Holdings

What Is Miko International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Miko International Holdings had debt of CN¥17.0m at the end of June 2023, a reduction from CN¥34.4m over a year. However, it does have CN¥101.2m in cash offsetting this, leading to net cash of CN¥84.2m.

How Healthy 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¥83.5m due within 12 months and liabilities of CN¥1.30m due beyond that. Offsetting this, it had CN¥101.2m in cash and CN¥59.3m in receivables that were due within 12 months. So it actually has CN¥75.7m 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). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 it is Miko International 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.

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?

Although Miko International Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥2.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Given it also grew revenue by 27% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. 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. For instance, we've identified 4 warning signs for Miko International Holdings (1 doesn't sit too well with us) you should be aware of.

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.