Health Check: How Prudently Does My Humble House Hospitality Management Consulting (TPE:2739) Use 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 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. Importantly, My Humble House Hospitality Management Consulting Co., Ltd. (TPE:2739) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for My Humble House Hospitality Management Consulting

What Is My Humble House Hospitality Management Consulting's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 My Humble House Hospitality Management Consulting had NT$85.8m of debt, an increase on NT$9.38m, over one year. However, its balance sheet shows it holds NT$391.3m in cash, so it actually has NT$305.5m net cash.

How Strong Is My Humble House Hospitality Management Consulting's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that My Humble House Hospitality Management Consulting had liabilities of NT$1.68b due within 12 months and liabilities of NT$11.2b due beyond that. Offsetting this, it had NT$391.3m in cash and NT$70.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$12.4b.

The deficiency here weighs heavily on the NT$2.51b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, My Humble House Hospitality Management Consulting would likely require a major re-capitalisation if it had to pay its creditors today. My Humble House Hospitality Management Consulting boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if My Humble House Hospitality Management Consulting can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year My Humble House Hospitality Management Consulting had a loss before interest and tax, and actually shrunk its revenue by 29%, to NT$3.2b. That makes us nervous, to say the least.

So How Risky Is My Humble House Hospitality Management Consulting?

Although My Humble House Hospitality Management Consulting had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$685m. 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. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. We've identified 3 warning signs with My Humble House Hospitality Management Consulting (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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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