Is Moiselle International Holdings (HKG:130) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Moiselle International Holdings Limited (HKG:130) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Moiselle International Holdings

How Much Debt Does Moiselle International Holdings Carry?

As you can see below, at the end of September 2020, Moiselle International Holdings had HK$43.8m of debt, up from HK$20.5m a year ago. Click the image for more detail. On the flip side, it has HK$25.5m in cash leading to net debt of about HK$18.3m.

How Strong Is Moiselle International Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Moiselle International Holdings had liabilities of HK$132.1m due within 12 months and liabilities of HK$122.4m due beyond that. On the other hand, it had cash of HK$25.5m and HK$27.3m worth of receivables due within a year. So its liabilities total HK$201.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$80.6m company, like a colossus towering over mere mortals. 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. 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 Moiselle 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, Moiselle International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$140m, which is a fall of 39%. That makes us nervous, to say the least.

Caveat Emptor

While Moiselle International Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$88m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost HK$119m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. To that end, you should learn about the 2 warning signs we've spotted with Moiselle International Holdings (including 1 which is shouldn't be ignored) .

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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