Is M H Group (TYO:9439) Using Too Much 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.' 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 can see that M H Group Ltd. (TYO:9439) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for M H Group

What Is M H Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 M H Group had JP¥245.0m of debt, an increase on JP¥65.0m, over one year. However, it does have JP¥496.0m in cash offsetting this, leading to net cash of JP¥251.0m.

A Look At M H Group's Liabilities

The latest balance sheet data shows that M H Group had liabilities of JP¥968.0m due within a year, and liabilities of JP¥231.0m falling due after that. Offsetting these obligations, it had cash of JP¥496.0m as well as receivables valued at JP¥703.0m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that M H Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the JP¥2.26b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, M H Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since M H Group will need earnings to service that debt. 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.

Over 12 months, M H Group made a loss at the EBIT level, and saw its revenue drop to JP¥1.7b, which is a fall of 15%. That's not what we would hope to see.

So How Risky Is M H Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year M H Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥96m of cash and made a loss of JP¥114m. With only JP¥251.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 3 warning signs for M H Group you should be aware of, and 2 of them don't sit too well with us.

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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