Is Miji International Holdings (HKG:1715) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Miji International Holdings Limited (HKG:1715) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Miji International Holdings

What Is Miji International Holdings's Net Debt?

As you can see below, Miji International Holdings had CN¥29.0m of debt at June 2021, down from CN¥38.3m a year prior. But it also has CN¥48.1m in cash to offset that, meaning it has CN¥19.1m net cash.

How Healthy Is Miji International Holdings' Balance Sheet?

According to the last reported balance sheet, Miji International Holdings had liabilities of CN¥50.9m due within 12 months, and liabilities of CN¥7.10m due beyond 12 months. Offsetting these obligations, it had cash of CN¥48.1m as well as receivables valued at CN¥46.7m due within 12 months. So it can boast CN¥36.8m more liquid assets than total liabilities.

This surplus suggests that Miji International Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Miji 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 Miji International Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥160m. To be frank that doesn't bode well.

So How Risky Is Miji International Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Miji International Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥23m of cash and made a loss of CN¥25m. With only CN¥19.1m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Miji International Holdings (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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