Madison Holdings Group (HKG:8057) Is Carrying A Fair Bit 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Madison Holdings Group Limited (HKG:8057) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Madison Holdings Group

What Is Madison Holdings Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Madison Holdings Group had HK$159.5m of debt in September 2024, down from HK$219.1m, one year before. However, it does have HK$27.7m in cash offsetting this, leading to net debt of about HK$131.9m.

How Healthy Is Madison Holdings Group's Balance Sheet?

We can see from the most recent balance sheet that Madison Holdings Group had liabilities of HK$187.3m falling due within a year, and liabilities of HK$423.0k due beyond that. Offsetting these obligations, it had cash of HK$27.7m as well as receivables valued at HK$288.1m due within 12 months. So it can boast HK$128.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Madison Holdings Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Madison Holdings Group 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.

Over 12 months, Madison Holdings Group made a loss at the EBIT level, and saw its revenue drop to HK$68m, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

While Madison Holdings Group'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 a very considerable HK$21m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. For example - Madison Holdings Group has 1 warning sign we think you should be aware of.

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.

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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.