MGM China Holdings (HKG:2282) Is Making Moderate Use 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.' 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. Importantly, MGM China Holdings Limited (HKG:2282) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 2020, MGM China Holdings had HK$21.2b of debt, up from HK$16.6b a year ago. Click the image for more detail. However, because it has a cash reserve of HK$2.64b, its net debt is less, at about HK$18.5b.

How Strong Is MGM China Holdings' Balance Sheet?

The latest balance sheet data shows that MGM China Holdings had liabilities of HK$3.29b due within a year, and liabilities of HK$21.4b falling due after that. On the other hand, it had cash of HK$2.64b and HK$292.4m worth of receivables due within a year. So its liabilities total HK$21.7b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since MGM China Holdings has a market capitalization of HK$52.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 made a loss at the EBIT level, and saw its revenue drop to HK$5.1b, which is a fall of 78%. That makes us nervous, to say the least.

Caveat Emptor

While MGM China Holdings'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$4.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$3.0b of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - MGM China Holdings has 1 warning sign we think you should be aware of.

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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