Is MGM China Holdings (HKG:2282) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that MGM China Holdings Limited (HKG:2282) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MGM China Holdings

How Much Debt Does MGM China Holdings Carry?

As you can see below, at the end of December 2021, MGM China Holdings had HK$23.9b of debt, up from HK$21.2b a year ago. Click the image for more detail. On the flip side, it has HK$3.11b in cash leading to net debt of about HK$20.8b.

How Strong Is MGM China Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MGM China Holdings had liabilities of HK$3.11b due within 12 months and liabilities of HK$24.1b due beyond that. Offsetting these obligations, it had cash of HK$3.11b as well as receivables valued at HK$269.9m due within 12 months. So its liabilities total HK$23.9b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's HK$18.5b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MGM China Holdings can strengthen its balance sheet over time. 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, MGM China Holdings reported revenue of HK$9.4b, which is a gain of 85%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, MGM China Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$2.3b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$977m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. To that end, you should learn about the 2 warning signs we've spotted with MGM China Holdings (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.