Is Montnets Cloud Technology Group (SZSE:002123) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Montnets Cloud Technology Group Co., Ltd. (SZSE:002123) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

See 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¥1.52b of debt at September 2024, down from CN¥1.69b a year prior. However, it does have CN¥1.26b in cash offsetting this, leading to net debt of about CN¥260.6m.

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

The latest balance sheet data shows that Montnets Cloud Technology Group had liabilities of CN¥2.17b due within a year, and liabilities of CN¥198.8m falling due after that. On the other hand, it had cash of CN¥1.26b and CN¥1.54b worth of receivables due within a year. So it can boast CN¥430.5m 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. 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 Montnets Cloud Technology Group 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.

Over 12 months, Montnets Cloud Technology Group reported revenue of CN¥5.2b, which is a gain of 4.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Montnets Cloud Technology Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥99m. 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. 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. For instance, we've identified 1 warning sign for Montnets Cloud Technology Group that you should be aware of.

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.