Midland Holdings (HKG:1200) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Midland Holdings Limited (HKG:1200) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Midland Holdings

What Is Midland Holdings's Debt?

As you can see below, Midland Holdings had HK$1.17b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$1.73b in cash offsetting this, leading to net cash of HK$564.8m.

How Healthy Is Midland Holdings' Balance Sheet?

The latest balance sheet data shows that Midland Holdings had liabilities of HK$4.65b due within a year, and liabilities of HK$271.4m falling due after that. Offsetting these obligations, it had cash of HK$1.73b as well as receivables valued at HK$3.13b due within 12 months. So these liquid assets roughly match the total liabilities.

Given Midland Holdings has a market capitalization of HK$437.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Midland Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Midland Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Midland Holdings made a loss at the EBIT level, and saw its revenue drop to HK$4.3b, which is a fall of 28%. To be frank that doesn't bode well.

So How Risky Is Midland Holdings?

While Midland Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$431m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example - Midland Holdings has 1 warning sign we think you should be aware of.

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.