Is Mobly (BVMF:MBLY3) Using Debt Sensibly?

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.' 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 Mobly S.A. (BVMF:MBLY3) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mobly

What Is Mobly's Debt?

As you can see below, at the end of June 2024, Mobly had R$46.3m of debt, up from R$27.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds R$100.8m in cash, so it actually has R$54.6m net cash.

How Strong Is Mobly's Balance Sheet?

We can see from the most recent balance sheet that Mobly had liabilities of R$165.5m falling due within a year, and liabilities of R$120.1m due beyond that. Offsetting these obligations, it had cash of R$100.8m as well as receivables valued at R$215.7m due within 12 months. So it actually has R$30.9m more liquid assets than total liabilities.

This surplus suggests that Mobly has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Mobly has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mobly 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.

Over 12 months, Mobly made a loss at the EBIT level, and saw its revenue drop to R$549m, which is a fall of 10%. That's not what we would hope to see.

So How Risky Is Mobly?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Mobly had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of R$69m and booked a R$82m accounting loss. However, it has net cash of R$54.6m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Mobly you should be aware of, and 1 of them can't be ignored.

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.