Mulsanne Group Holding (HKG:1817) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mulsanne Group Holding Limited (HKG:1817) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Mulsanne Group Holding

What Is Mulsanne Group Holding's Net Debt?

As you can see below, at the end of June 2022, Mulsanne Group Holding had CN¥1.49b of debt, up from CN¥1.41b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥539.4m, its net debt is less, at about CN¥951.9m.

How Strong Is Mulsanne Group Holding's Balance Sheet?

The latest balance sheet data shows that Mulsanne Group Holding had liabilities of CN¥1.98b due within a year, and liabilities of CN¥282.8m falling due after that. Offsetting these obligations, it had cash of CN¥539.4m as well as receivables valued at CN¥293.9m due within 12 months. So its liabilities total CN¥1.43b more than the combination of its cash and short-term receivables.

Mulsanne Group Holding has a market capitalization of CN¥3.40b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mulsanne Group Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Mulsanne Group Holding made a loss at the EBIT level, and saw its revenue drop to CN¥2.5b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

While Mulsanne Group Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥29m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥75m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Mulsanne Group Holding you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.