Does Melco International Development (HKG:200) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Melco International Development Limited (HKG:200) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Melco International Development

What Is Melco International Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Melco International Development had HK$50.6b of debt, an increase on HK$41.3b, over one year. However, it also had HK$13.9b in cash, and so its net debt is HK$36.8b.

How Healthy Is Melco International Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Melco International Development had liabilities of HK$13.1b due within 12 months and liabilities of HK$51.7b due beyond that. Offsetting this, it had HK$13.9b in cash and HK$1.01b in receivables that were due within 12 months. So its liabilities total HK$49.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$22.7b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Melco International Development would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Melco International Development can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Melco International Development had a loss before interest and tax, and actually shrunk its revenue by 70%, to HK$13b. That makes us nervous, to say the least.

Caveat Emptor

While Melco International Development's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$8.1b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$6.3b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Be aware that Melco International Development is showing 1 warning sign 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. 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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