Is Mubang High-TechLtd (SHSE:603398) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Mubang High-Tech Co.,Ltd. (SHSE:603398) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Mubang High-TechLtd

How Much Debt Does Mubang High-TechLtd Carry?

As you can see below, at the end of March 2024, Mubang High-TechLtd had CN¥416.6m of debt, up from CN¥272.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥687.6m in cash, leading to a CN¥270.9m net cash position.

How Strong Is Mubang High-TechLtd's Balance Sheet?

According to the last reported balance sheet, Mubang High-TechLtd had liabilities of CN¥3.06b due within 12 months, and liabilities of CN¥587.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥687.6m as well as receivables valued at CN¥872.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.09b.

While this might seem like a lot, it is not so bad since Mubang High-TechLtd has a market capitalization of CN¥7.69b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Mubang High-TechLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Mubang High-TechLtd will need earnings to service that debt. 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.

In the last year Mubang High-TechLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to CN¥1.7b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Mubang High-TechLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Mubang High-TechLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥739m of cash and made a loss of CN¥38m. Given it only has net cash of CN¥270.9m, the company may need to raise more capital if it doesn't reach break-even soon. Mubang High-TechLtd's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Mubang High-TechLtd (1 is a bit concerning) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.