These 4 Measures Indicate That Montage Technology (SHSE:688008) Is Using Debt Safely

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, Montage Technology Co., Ltd. (SHSE:688008) does carry debt. But the real question is whether this debt is making the company risky.

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Montage Technology

How Much Debt Does Montage Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Montage Technology had CN¥37.8m of debt, an increase on none, over one year. However, it does have CN¥7.74b in cash offsetting this, leading to net cash of CN¥7.70b.

A Look At Montage Technology's Liabilities

We can see from the most recent balance sheet that Montage Technology had liabilities of CN¥520.7m falling due within a year, and liabilities of CN¥114.3m due beyond that. On the other hand, it had cash of CN¥7.74b and CN¥265.1m worth of receivables due within a year. So it can boast CN¥7.37b more liquid assets than total liabilities.

This short term liquidity is a sign that Montage Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Montage Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Montage Technology grew its EBIT by 594% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Montage Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Montage Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Montage Technology recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Montage Technology has CN¥7.70b in net cash and a decent-looking balance sheet. And we liked the look of last year's 594% year-on-year EBIT growth. So we don't think Montage Technology's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Montage Technology's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.