Is Maike Tube Industry Holdings (HKG:1553) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Maike Tube Industry Holdings Limited (HKG:1553) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Maike Tube Industry Holdings

What Is Maike Tube Industry Holdings's Debt?

As you can see below, Maike Tube Industry Holdings had CN¥131.8m of debt at June 2022, down from CN¥174.2m a year prior. However, its balance sheet shows it holds CN¥144.7m in cash, so it actually has CN¥12.9m net cash.

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¥437.4m due within 12 months and liabilities of CN¥15.4m due beyond that. On the other hand, it had cash of CN¥144.7m and CN¥367.6m worth of receivables due within a year. So it actually has CN¥59.5m more liquid assets than total liabilities.

This excess liquidity suggests that Maike Tube Industry Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Maike Tube Industry Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Maike Tube Industry Holdings grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Maike Tube Industry 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Maike Tube Industry 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, Maike Tube Industry Holdings created free cash flow amounting to 16% 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 Maike Tube Industry Holdings has net cash of CN¥12.9m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 28% over the last year. So is Maike Tube Industry 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. For example, we've discovered 3 warning signs for Maike Tube Industry Holdings that you should be aware of before investing here.

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. 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.