Would Miko International Holdings (HKG:1247) Be Better Off With Less Debt?

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.' 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 real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Miko International Holdings

What Is Miko International Holdings's Debt?

As you can see below, Miko International Holdings had CN¥57.9m of debt at June 2020, down from CN¥72.4m a year prior. However, because it has a cash reserve of CN¥38.8m, its net debt is less, at about CN¥19.1m.

How Strong Is Miko International Holdings's Balance Sheet?

According to the last reported balance sheet, Miko International Holdings had liabilities of CN¥67.2m due within 12 months, and liabilities of CN¥14.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥38.8m as well as receivables valued at CN¥57.7m due within 12 months. So it actually has CN¥14.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Miko International Holdings's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. 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 9.8%, to CN¥152m. That's not what we would hope to see.

Caveat Emptor

Importantly, Miko International Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥132m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But a profit would do more to inspire us to research the business more closely. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Miko International Holdings , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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