We Think Mansion International Holdings (HKG:8456) Has A Fair Chunk Of Debt

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.' 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 is this debt a concern to shareholders?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mansion International Holdings

What Is Mansion International Holdings's Debt?

As you can see below, Mansion International Holdings had HK$12.4m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$1.37m in cash, and so its net debt is HK$11.1m.

How Healthy Is Mansion International Holdings' Balance Sheet?

According to the balance sheet data, Mansion International Holdings had liabilities of HK$23.0m due within 12 months, but no longer term liabilities. Offsetting this, it had HK$1.37m in cash and HK$21.9m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Mansion International Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the HK$42.5m company is short on cash, but still worth keeping an eye on the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mansion 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.

In the last year Mansion International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 5.3%, to HK$78m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Mansion International Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$10m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Mansion International Holdings is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.