Would MGM China Holdings (HKG:2282) Be Better Off With Less Debt?

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 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 can see that MGM China Holdings Limited (HKG:2282) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for MGM China Holdings

What Is MGM China Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 MGM China Holdings had debt of HK$21.2b, up from HK$16.6b in one year. However, because it has a cash reserve of HK$2.64b, its net debt is less, at about HK$18.5b.

How Healthy Is MGM China Holdings' Balance Sheet?

We can see from the most recent balance sheet that MGM China Holdings had liabilities of HK$3.29b falling due within a year, and liabilities of HK$21.4b due beyond that. Offsetting these obligations, it had cash of HK$2.64b as well as receivables valued at HK$292.4m due within 12 months. 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$47.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 MGM China Holdings 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.

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

Not only did MGM China Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$4.1b at the EBIT level. 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$3.8b of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 1 warning sign for MGM China Holdings you should be aware of.

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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