We Think Maike Tube Industry Holdings (HKG:1553) Can Manage Its Debt With Ease

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.' 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. We note that Maike Tube Industry Holdings Limited (HKG:1553) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Maike Tube Industry Holdings

What Is Maike Tube Industry Holdings's Net Debt?

As you can see below, Maike Tube Industry Holdings had CN¥63.7m of debt at December 2020, down from CN¥237.5m a year prior. But on the other hand it also has CN¥263.9m in cash, leading to a CN¥200.2m net cash position.

A Look At Maike Tube Industry Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Maike Tube Industry Holdings had liabilities of CN¥240.5m due within 12 months and liabilities of CN¥2.69m due beyond that. On the other hand, it had cash of CN¥263.9m and CN¥260.3m worth of receivables due within a year. So it can boast CN¥281.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Maike Tube Industry Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Maike Tube Industry Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Maike Tube Industry Holdings has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent three years, Maike Tube Industry Holdings recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Maike Tube Industry Holdings has CN¥200.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥184m, being 67% of its EBIT. So we don't think Maike Tube Industry Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Maike Tube Industry Holdings , and understanding them should be part of your investment process.

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. 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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