Is Major Holdings (HKG:1389) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Major Holdings Limited (HKG:1389) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Major Holdings

How Much Debt Does Major Holdings Carry?

The image below, which you can click on for greater detail, shows that Major Holdings had debt of HK$17.8m at the end of March 2021, a reduction from HK$30.1m over a year. However, it also had HK$6.90m in cash, and so its net debt is HK$10.9m.

How Strong Is Major Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Major Holdings had liabilities of HK$38.1m due within 12 months and liabilities of HK$1.41m due beyond that. Offsetting this, it had HK$6.90m in cash and HK$27.8m in receivables that were due within 12 months. So its liabilities total HK$4.88m more than the combination of its cash and short-term receivables.

Given Major Holdings has a market capitalization of HK$129.7m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Major 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 Major Holdings had a loss before interest and tax, and actually shrunk its revenue by 26%, to HK$115m. That makes us nervous, to say the least.

Caveat Emptor

While Major Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost HK$4.5m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$5.0m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Major Holdings (1 makes us a bit uncomfortable) you should be aware of.

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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