We Think Midland Holdings (HKG:1200) Can Manage Its Debt With Ease

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. We note that Midland Holdings Limited (HKG:1200) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Midland Holdings

What Is Midland Holdings's Debt?

As you can see below, at the end of June 2024, Midland Holdings had HK$361.0m of debt, up from HK$200.9m a year ago. Click the image for more detail. However, it does have HK$664.6m in cash offsetting this, leading to net cash of HK$303.6m.

A Look At Midland Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Midland Holdings had liabilities of HK$4.13b due within 12 months and liabilities of HK$84.9m due beyond that. Offsetting these obligations, it had cash of HK$664.6m as well as receivables valued at HK$3.98b due within 12 months. So it actually has HK$430.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Midland Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Midland Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Midland Holdings turned things around in the last 12 months, delivering and EBIT of HK$146m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Midland Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Midland Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Midland Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Midland Holdings has net cash of HK$303.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$386m, being 265% of its EBIT. So we don't think Midland Holdings's use of debt is risky. 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. For example, we've discovered 1 warning sign for Midland Holdings that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.