Miko International Holdings (HKG:1247) Is Carrying A Fair Bit Of 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. As with many other companies Miko International Holdings Limited (HKG:1247) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Miko International Holdings

What Is Miko International Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Miko International Holdings had CN¥59.1m in debt in December 2020; about the same as the year before. On the flip side, it has CN¥39.2m in cash leading to net debt of about CN¥19.9m.

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¥81.9m due within 12 months and liabilities of CN¥1.30m due beyond that. Offsetting this, it had CN¥39.2m in cash and CN¥59.0m in receivables that were due within 12 months. So it can boast CN¥15.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Miko International Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 30%, to CN¥116m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Miko International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥73m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. To that end, you should learn about the 3 warning signs we've spotted with Miko International Holdings (including 2 which make us uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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