Is Mansion International Holdings (HKG:8456) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Mansion International Holdings Limited (HKG:8456) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mansion International Holdings

How Much Debt Does Mansion International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Mansion International Holdings had HK$12.9m of debt, an increase on HK$11.9m, over one year. But it also has HK$19.7m in cash to offset that, meaning it has HK$6.78m net cash.

How Healthy Is Mansion International Holdings' Balance Sheet?

According to the last reported balance sheet, Mansion International Holdings had liabilities of HK$26.9m due within 12 months, and liabilities of HK$1.35m due beyond 12 months. Offsetting these obligations, it had cash of HK$19.7m as well as receivables valued at HK$4.14m due within 12 months. So its liabilities total HK$4.41m more than the combination of its cash and short-term receivables.

Since publicly traded Mansion International Holdings shares are worth a total of HK$76.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Mansion International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Mansion 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 Mansion International Holdings had a loss before interest and tax, and actually shrunk its revenue by 15%, to HK$74m. That's not what we would hope to see.

So How Risky Is Mansion 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 Mansion 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 HK$32m and booked a HK$21m accounting loss. Given it only has net cash of HK$6.78m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Mansion International Holdings is showing 5 warning signs in our investment analysis , and 4 of those are a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.