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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Miramar Hotel and Investment Company, Limited (HKG:71) makes use of debt. But is this debt a concern to shareholders?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Miramar Hotel and Investment Company's Debt?
As you can see below, at the end of June 2019, Miramar Hotel and Investment Company had HK$27.7m of debt, up from HK$22.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$5.29b in cash, so it actually has HK$5.27b net cash.
A Look At Miramar Hotel and Investment Company's Liabilities
Zooming in on the latest balance sheet data, we can see that Miramar Hotel and Investment Company had liabilities of HK$1.12b due within 12 months and liabilities of HK$574.8m due beyond that. Offsetting this, it had HK$5.29b in cash and HK$280.7m in receivables that were due within 12 months. So it can boast HK$3.88b more liquid assets than total liabilities.
This luscious liquidity implies that Miramar Hotel and Investment Company's balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Succinctly put, Miramar Hotel and Investment Company boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Miramar Hotel and Investment Company grew its EBIT by 3.4% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Miramar Hotel and Investment Company will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Miramar Hotel and Investment Company may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Miramar Hotel and Investment Company recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
While it is always sensible to investigate a company's debt, in this case Miramar Hotel and Investment Company has HK$5.27b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in HK$926m. So is Miramar Hotel and Investment Company's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Miramar Hotel and Investment Company's dividend history, without delay!
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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