Here's Why MCC Meili Cloud Computing Industry Investment (SZSE:000815) Has A Meaningful Debt Burden

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that MCC Meili Cloud Computing Industry Investment Co., Ltd (SZSE:000815) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for MCC Meili Cloud Computing Industry Investment

What Is MCC Meili Cloud Computing Industry Investment's Debt?

As you can see below, MCC Meili Cloud Computing Industry Investment had CN¥333.7m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥99.6m in cash offsetting this, leading to net debt of about CN¥234.1m.

How Strong Is MCC Meili Cloud Computing Industry Investment's Balance Sheet?

We can see from the most recent balance sheet that MCC Meili Cloud Computing Industry Investment had liabilities of CN¥622.2m falling due within a year, and liabilities of CN¥197.3m due beyond that. Offsetting this, it had CN¥99.6m in cash and CN¥403.2m in receivables that were due within 12 months. So its liabilities total CN¥316.7m more than the combination of its cash and short-term receivables.

Since publicly traded MCC Meili Cloud Computing Industry Investment shares are worth a total of CN¥6.89b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Even though MCC Meili Cloud Computing Industry Investment's debt is only 1.9, its interest cover is really very low at 1.0. The main reason for this is that it has such high depreciation and amortisation. While companies often boast that these charges are non-cash, most such businesses will therefore require ongoing investment (that is not expensed.) Either way there's no doubt the stock is using meaningful leverage. Notably, MCC Meili Cloud Computing Industry Investment made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥11m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since MCC Meili Cloud Computing Industry Investment 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, MCC Meili Cloud Computing Industry Investment burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Both MCC Meili Cloud Computing Industry Investment's conversion of EBIT to free cash flow and its interest cover were discouraging. At least its level of total liabilities gives us reason to be optimistic. Taking the abovementioned factors together we do think MCC Meili Cloud Computing Industry Investment's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with MCC Meili Cloud Computing Industry Investment , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.