Does Maike Tube Industry Holdings (HKG:1553) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Maike Tube Industry Holdings Limited (HKG:1553) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Maike Tube Industry Holdings

How Much Debt Does Maike Tube Industry Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Maike Tube Industry Holdings had CN¥75.9m of debt in December 2022, down from CN¥166.4m, one year before. However, because it has a cash reserve of CN¥57.8m, its net debt is less, at about CN¥18.2m.

How Healthy Is Maike Tube Industry Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maike Tube Industry Holdings had liabilities of CN¥313.0m due within 12 months and liabilities of CN¥29.5m due beyond that. Offsetting this, it had CN¥57.8m in cash and CN¥397.2m in receivables that were due within 12 months. So it can boast CN¥112.4m more liquid assets than total liabilities.

It's good to see that Maike Tube Industry Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Maike Tube Industry Holdings's net debt is only 0.11 times its EBITDA. And its EBIT easily covers its interest expense, being 27.4 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Maike Tube Industry Holdings grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Maike Tube Industry Holdings will need earnings to service that debt. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Maike Tube Industry Holdings recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Maike Tube Industry Holdings's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Considering this range of factors, it seems to us that Maike Tube Industry Holdings is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Maike Tube Industry Holdings .

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. 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.