Modern Living Investments Holdings (HKG:8426) Has A Rock Solid Balance Sheet

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 Modern Living Investments Holdings Limited (HKG:8426) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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. 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 Modern Living Investments Holdings

What Is Modern Living Investments Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Modern Living Investments Holdings had HK$12.3m of debt, an increase on none, over one year. However, its balance sheet shows it holds HK$26.7m in cash, so it actually has HK$14.5m net cash.

A Look At Modern Living Investments Holdings's Liabilities

We can see from the most recent balance sheet that Modern Living Investments Holdings had liabilities of HK$63.6m falling due within a year, and liabilities of HK$670.0k due beyond that. Offsetting these obligations, it had cash of HK$26.7m as well as receivables valued at HK$87.4m due within 12 months. So it actually has HK$49.8m more liquid assets than total liabilities.

This surplus strongly suggests that Modern Living Investments Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Modern Living Investments Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Modern Living Investments Holdings grew its EBIT by 186% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Modern Living Investments 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, a company can only pay off debt with cold hard cash, not accounting profits. While Modern Living Investments 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. During the last three years, Modern Living Investments Holdings produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Modern Living Investments Holdings has HK$14.5m in net cash and a decent-looking balance sheet. And we liked the look of last year's 186% year-on-year EBIT growth. So is Modern Living Investments Holdings's debt a risk? It doesn't seem so to us. 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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Modern Living Investments Holdings you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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