Migao Group Holdings (HKG:9879) Has A Pretty Healthy Balance Sheet

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 note that Migao Group Holdings Limited (HKG:9879) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Migao Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Migao Group Holdings had CN¥582.3m of debt, an increase on CN¥545.2m, over one year. However, it does have CN¥833.6m in cash offsetting this, leading to net cash of CN¥251.2m.

How Strong Is Migao Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Migao Group Holdings had liabilities of CN¥2.16b falling due within a year, and liabilities of CN¥167.8m due beyond that. Offsetting this, it had CN¥833.6m in cash and CN¥3.20b in receivables that were due within 12 months. So it can boast CN¥1.70b more liquid assets than total liabilities.

This surplus strongly suggests that Migao Group Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Migao Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Migao Group Holdings

Also good is that Migao Group Holdings grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Migao Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Migao Group Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Migao Group Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Migao Group Holdings has net cash of CN¥251.2m, as well as more liquid assets than liabilities. And it also grew its EBIT by 13% over the last year. So we are not troubled with Migao Group Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Migao Group Holdings , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.