Stock Analysis

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

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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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Moiselle International Holdings Limited (HKG:130) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Moiselle International Holdings

What Is Moiselle International Holdings's Debt?

As you can see below, Moiselle International Holdings had HK$32.8m of debt at September 2022, down from HK$37.6m a year prior. However, it does have HK$13.6m in cash offsetting this, leading to net debt of about HK$19.1m.

SEHK:130 Debt to Equity History March 16th 2023

How Healthy Is Moiselle International Holdings' Balance Sheet?

The latest balance sheet data shows that Moiselle International Holdings had liabilities of HK$85.3m due within a year, and liabilities of HK$109.9m falling due after that. On the other hand, it had cash of HK$13.6m and HK$30.7m worth of receivables due within a year. So it has liabilities totalling HK$150.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$60.8m 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Moiselle International Holdings had a loss before interest and tax, and actually shrunk its revenue by 10%, to HK$128m. We would much prefer see growth.

Caveat Emptor

Not only did Moiselle 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 HK$55m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of HK$3.3m over the last twelve months. So suffice it to say we consider the stock to be risky. 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 be aware of the 3 warning signs we've spotted with Moiselle International Holdings .

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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