Is Ming Fai International Holdings (HKG:3828) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Ming Fai International Holdings Limited (HKG:3828) makes use of debt. But is this debt a concern to shareholders?

Our free stock report includes 2 warning signs investors should be aware of before investing in Ming Fai International Holdings. Read for free now.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Ming Fai International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Ming Fai International Holdings had HK$43.1m of debt in December 2024, down from HK$66.5m, one year before. However, it does have HK$331.0m in cash offsetting this, leading to net cash of HK$287.9m.

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$714.1m falling due within a year, and liabilities of HK$17.9m due beyond that. Offsetting this, it had HK$331.0m in cash and HK$741.1m in receivables that were due within 12 months. So it can boast HK$340.2m more liquid assets than total liabilities.

This surplus strongly suggests that Ming Fai International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Ming Fai International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Ming Fai International Holdings

Also positive, Ming Fai International Holdings grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ming Fai International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Ming Fai International Holdings produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ming Fai International Holdings has HK$287.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in HK$35m. At the end of the day we're not concerned about Ming Fai International Holdings's debt. 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. Case in point: We've spotted 2 warning signs for Ming Fai International Holdings you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.