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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that MCC Meili Cloud Computing Industry Investment Co., Ltd (SZSE:000815) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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¥279.4m of debt at March 2024, down from CN¥299.1m a year prior. However, because it has a cash reserve of CN¥140.6m, its net debt is less, at about CN¥138.9m.

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¥605.5m falling due within a year, and liabilities of CN¥202.2m due beyond that. Offsetting this, it had CN¥140.6m in cash and CN¥318.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥348.8m more than its cash and near-term receivables, combined.

Since publicly traded MCC Meili Cloud Computing Industry Investment shares are worth a total of CN¥5.14b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 1.2 times EBITDA, it is initially surprising to see that MCC Meili Cloud Computing Industry Investment's EBIT has low interest coverage of 0.96 times. So one way or the other, it's clear the debt levels are not trivial. Notably, MCC Meili Cloud Computing Industry Investment made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥8.0m in the last twelve months. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual 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. But its not so bad at managing its debt, based on its EBITDA,. When we consider all the factors discussed, it seems to us that MCC Meili Cloud Computing Industry Investment is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for MCC Meili Cloud Computing Industry Investment that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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