We Think Ming Fai International Holdings (HKG:3828) Can Manage Its Debt With Ease

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. Importantly, Ming Fai International Holdings Limited (HKG:3828) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at 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 at June 2020 Ming Fai International Holdings had debt of HK$150.7m, up from HK$92.6m in one year. However, it does have HK$383.9m in cash offsetting this, leading to net cash of HK$233.1m.

How Healthy Is Ming Fai International Holdings's Balance Sheet?

We can see from the most recent balance sheet that Ming Fai International Holdings had liabilities of HK$575.2m falling due within a year, and liabilities of HK$16.8m due beyond that. On the other hand, it had cash of HK$383.9m and HK$465.9m worth of receivables due within a year. So it can boast HK$257.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Ming Fai International Holdings's 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!

Also positive, Ming Fai International Holdings grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. In the last three years, Ming Fai International Holdings created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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$233.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 25% over the last year. So is Ming Fai International Holdings's debt a risk? It doesn't seem so to us. 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. Take risks, for example - Ming Fai International Holdings has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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