These 4 metrics indicate that Man Yue Technology Holdings (HKG: 894) is using debt extensively
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Man Yue Technology Holdings Limited (HKG: 894) uses debt in his business. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest review for Man Yue Technology Holdings
What is the net debt of Man Yue Technology Holdings?
As you can see below, at the end of June 2021, Man Yue Technology Holdings was in debt of HK $ 1.12 billion, up from HK $ 1.02 billion a year ago. Click on the image for more details. On the other hand, he has HK $ 223.0million in cash, resulting in net debt of around HK $ 896.2million.
How healthy is Man Yue Technology Holdings’ balance sheet?
We can see from the most recent balance sheet that Man Yue Technology Holdings had a liability of HK $ 1.68 billion maturing within one year and a liability of HK $ 107.3 million as of of the. In compensation for these obligations, he had cash of HK $ 223.0 million as well as receivables valued at HK $ 857.3 million due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by HK $ 705.4 million.
Given that this deficit is actually greater than the company’s market cap of HK $ 556.4 million, we think shareholders should really watch Man Yue Technology Holdings’ debt levels, like a parent watching her child riding a bicycle for the first time. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.
Man Yue Technology Holdings’ debt is 4.8 times its EBITDA, and its EBIT covers its interest costs 4.6 times more. Overall, this implies that while we wouldn’t like to see debt levels rise, we believe it can handle its current leverage. Notably, Man Yue Technology Holdings’s EBIT was higher than Elon Musk’s, gaining a whopping 650% from last year. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Man Yue Technology Holdings will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We must therefore clearly examine whether this EBIT leads to the corresponding free cash flow. Over the past three years, Man Yue Technology Holdings has spent a lot of money. While investors no doubt expect this situation to reverse in due course, this clearly means its use of debt is riskier.
Our point of view
We would go so far as to say that Man Yue Technology Holdings’ conversion of EBIT to free cash flow was disappointing. But on the positive side, its EBIT growth rate is a good sign and makes us more optimistic. Overall, we think it’s fair to say that Man Yue Technology Holdings has enough debt that there is real risk around the balance sheet. If all goes well, it may pay off, but the downside to this debt is an increased risk of permanent losses. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Man Yue Technology Holdings (1 of which doesn’t suit us very well!) you should know that.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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