Melco International Development (HKG:200) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Melco International Development Limited (HKG:200) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Melco International Development

What Is Melco International Development's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Melco International Development had HK$64.2b of debt, an increase on HK$54.5b, over one year. However, it does have HK$13.2b in cash offsetting this, leading to net debt of about HK$51.1b.

A Look At Melco International Development's Liabilities

Zooming in on the latest balance sheet data, we can see that Melco International Development had liabilities of HK$15.1b due within 12 months and liabilities of HK$61.6b due beyond that. Offsetting this, it had HK$13.2b in cash and HK$389.5m in receivables that were due within 12 months. So its liabilities total HK$63.1b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$13.8b 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 it is future earnings, more than anything, that will determine Melco International Development's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Melco International Development made a loss at the EBIT level, and saw its revenue drop to HK$13b, which is a fall of 6.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Melco International Development produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$5.7b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized HK$5.0b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. We've identified 2 warning signs with Melco International Development (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.