Does Ming Fai International Holdings (HKG:3828) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Ming Fai International Holdings Limited (HKG:3828) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ming Fai International Holdings

What Is Ming Fai International Holdings's Debt?

As you can see below, at the end of December 2020, Ming Fai International Holdings had HK$138.6m of debt, up from HK$83.9m a year ago. Click the image for more detail. But on the other hand it also has HK$395.4m in cash, leading to a HK$256.8m net cash position.

How Strong Is Ming Fai International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Ming Fai International Holdings had liabilities of HK$586.9m falling due within a year, and liabilities of HK$24.2m due beyond that. On the other hand, it had cash of HK$395.4m and HK$514.5m worth of receivables due within a year. So it can boast HK$298.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Ming Fai International Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Ming Fai International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Ming Fai International Holdings's EBIT dived 20%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ming Fai International Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Ming Fai International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Ming Fai International Holdings's free cash flow amounted to 20% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Ming Fai International Holdings has net cash of HK$256.8m, as well as more liquid assets than liabilities. So we are not troubled with Ming Fai International Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Ming Fai International Holdings has 2 warning signs we think 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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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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