Does MS Concept (HKG:8447) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that MS Concept Limited (HKG:8447) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MS Concept

What Is MS Concept's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 MS Concept had HK$58.7m of debt, an increase on HK$10.9m, over one year. However, its balance sheet shows it holds HK$67.7m in cash, so it actually has HK$9.00m net cash.

How Healthy Is MS Concept's Balance Sheet?

The latest balance sheet data shows that MS Concept had liabilities of HK$52.7m due within a year, and liabilities of HK$34.0m falling due after that. On the other hand, it had cash of HK$67.7m and HK$907.0k worth of receivables due within a year. So its liabilities total HK$18.0m more than the combination of its cash and short-term receivables.

MS Concept has a market capitalization of HK$64.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, MS Concept also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MS Concept's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year MS Concept wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to HK$224m. With any luck the company will be able to grow its way to profitability.

So How Risky Is MS Concept?

Although MS Concept had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$2.0m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. One positive is that MS Concept is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for MS Concept you should be aware of, and 2 of them are significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.