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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.' 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 note that Man Yue Technology Holdings Limited (HKG:894) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Man Yue Technology Holdings
How Much Debt Does Man Yue Technology Holdings Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Man Yue Technology Holdings had debt of HK$932.8m, up from HK$837.7m in one year. However, it also had HK$237.3m in cash, and so its net debt is HK$695.5m.
A Look At Man Yue Technology Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that Man Yue Technology Holdings had liabilities of HK$1.20b due within 12 months and liabilities of HK$195.6m due beyond that. Offsetting these obligations, it had cash of HK$237.3m as well as receivables valued at HK$588.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$567.8m.
The deficiency here weighs heavily on the HK$233.0m 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'd watch its balance sheet closely, without a doubt After all, Man Yue Technology Holdings would likely require a major re-capitalisation if it had to pay its creditors today.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.