Is MGI Tech (SHSE:688114) Using Debt In A Risky Way?

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 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. Importantly, MGI Tech Co., Ltd. (SHSE:688114) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for MGI Tech

How Much Debt Does MGI Tech Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 MGI Tech had CN¥487.1m of debt, an increase on CN¥299.6m, over one year. However, its balance sheet shows it holds CN¥3.62b in cash, so it actually has CN¥3.14b net cash.

A Look At MGI Tech's Liabilities

Zooming in on the latest balance sheet data, we can see that MGI Tech had liabilities of CN¥1.28b due within 12 months and liabilities of CN¥672.3m due beyond that. On the other hand, it had cash of CN¥3.62b and CN¥1.23b worth of receivables due within a year. So it actually has CN¥2.90b more liquid assets than total liabilities.

This surplus suggests that MGI Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MGI Tech has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MGI Tech 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.

In the last year MGI Tech had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥2.6b. That's not what we would hope to see.

So How Risky Is MGI Tech?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year MGI Tech had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥1.4b and booked a CN¥873m accounting loss. But the saving grace is the CN¥3.14b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that MGI Tech is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.