We Think Madison Holdings Group (HKG:8057) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Madison Holdings Group Limited (HKG:8057) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Madison Holdings Group

What Is Madison Holdings Group's Net Debt?

As you can see below, Madison Holdings Group had HK$348.4m of debt at March 2021, down from HK$539.2m a year prior. However, because it has a cash reserve of HK$29.8m, its net debt is less, at about HK$318.6m.

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$275.2m falling due within a year, and liabilities of HK$135.2m due beyond that. Offsetting this, it had HK$29.8m in cash and HK$396.3m in receivables that were due within 12 months. So it actually has HK$15.7m more liquid assets than total liabilities.

This state of affairs indicates that Madison Holdings Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$922.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Madison Holdings Group 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.

Over 12 months, Madison Holdings Group made a loss at the EBIT level, and saw its revenue drop to HK$107m, which is a fall of 46%. To be frank that doesn't bode well.

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. To be specific the EBIT loss came in at HK$17m. 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. But a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. 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 3 warning signs with Madison Holdings Group (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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. 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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