Here's Why Montnets Cloud Technology Group (SZSE:002123) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Montnets Cloud Technology Group Co., Ltd. (SZSE:002123) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Montnets Cloud Technology Group

How Much Debt Does Montnets Cloud Technology Group Carry?

As you can see below, Montnets Cloud Technology Group had CN¥1.69b of debt at September 2023, down from CN¥1.81b a year prior. However, it does have CN¥1.33b in cash offsetting this, leading to net debt of about CN¥357.7m.

How Strong Is Montnets Cloud Technology Group's Balance Sheet?

We can see from the most recent balance sheet that Montnets Cloud Technology Group had liabilities of CN¥2.24b falling due within a year, and liabilities of CN¥209.9m due beyond that. On the other hand, it had cash of CN¥1.33b and CN¥1.49b worth of receivables due within a year. So it can boast CN¥366.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Montnets Cloud Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Montnets Cloud Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Montnets Cloud Technology Group reported revenue of CN¥5.0b, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Montnets Cloud Technology Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥17m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. For riskier companies like Montnets Cloud Technology Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.