Health Check: How Prudently Does Miji International Holdings (HKG:1715) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Miji International Holdings Limited (HKG:1715) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Miji International Holdings

What Is Miji International Holdings's Debt?

The image below, which you can click on for greater detail, shows that Miji International Holdings had debt of CN¥25.4m at the end of June 2022, a reduction from CN¥29.0m over a year. However, its balance sheet shows it holds CN¥35.8m in cash, so it actually has CN¥10.4m net cash.

How Healthy Is Miji International Holdings' Balance Sheet?

According to the last reported balance sheet, Miji International Holdings had liabilities of CN¥52.7m due within 12 months, and liabilities of CN¥5.23m due beyond 12 months. On the other hand, it had cash of CN¥35.8m and CN¥38.6m worth of receivables due within a year. So it actually has CN¥16.4m more liquid assets than total liabilities.

This surplus suggests that Miji International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Miji International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Miji 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.

In the last year Miji International Holdings had a loss before interest and tax, and actually shrunk its revenue by 26%, to CN¥119m. That makes us nervous, to say the least.

So How Risky Is Miji International Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Miji International Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥13m and booked a CN¥46m accounting loss. With only CN¥10.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Miji International Holdings is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.