Does Moiselle International Holdings (HKG:130) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Moiselle International Holdings Limited (HKG:130) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Moiselle International Holdings

How Much Debt Does Moiselle International Holdings Carry?

The image below, which you can click on for greater detail, shows that Moiselle International Holdings had debt of HK$12.9m at the end of March 2022, a reduction from HK$53.5m over a year. But on the other hand it also has HK$14.4m in cash, leading to a HK$1.51m net cash position.

A Look At Moiselle International Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Moiselle International Holdings had liabilities of HK$81.6m due within 12 months and liabilities of HK$118.4m due beyond that. On the other hand, it had cash of HK$14.4m and HK$8.02m worth of receivables due within a year. So its liabilities total HK$177.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$74.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Moiselle International Holdings would likely require a major re-capitalisation if it had to pay its creditors today. Given that Moiselle International Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But it is Moiselle 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.

Over 12 months, Moiselle International Holdings reported revenue of HK$139m, which is a gain of 8.8%, 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 Moiselle International Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Moiselle International Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$1.1m of cash and made a loss of HK$41m. Given it only has net cash of HK$1.51m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Moiselle International Holdings has 2 warning signs we think you should be aware of.

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.

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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.