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

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.' 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 the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Ming Fai International Holdings

What Is Ming Fai International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Ming Fai International Holdings had debt of HK$125.4m at the end of June 2021, a reduction from HK$150.7m over a year. But on the other hand it also has HK$357.1m in cash, leading to a HK$231.7m 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$498.6m falling due within a year, and liabilities of HK$21.4m due beyond that. On the other hand, it had cash of HK$357.1m and HK$409.0m worth of receivables due within a year. So it actually has HK$246.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Ming Fai International Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Ming Fai International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Ming Fai International Holdings's saving grace is its low debt levels, because its EBIT has tanked 84% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, Ming Fai International Holdings recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Ming Fai International Holdings has HK$231.7m in net cash and a decent-looking balance sheet. So we are not troubled with Ming Fai International Holdings's debt use. 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. For instance, we've identified 2 warning signs for Ming Fai International Holdings that you should be aware of.

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.