Is Mobvista (HKG:1860) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Mobvista Inc. (HKG:1860) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mobvista

How Much Debt Does Mobvista Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Mobvista had US$118.7m of debt, an increase on US$101.1m, over one year. However, its balance sheet shows it holds US$134.5m in cash, so it actually has US$15.9m net cash.

How Strong Is Mobvista's Balance Sheet?

According to the last reported balance sheet, Mobvista had liabilities of US$334.9m due within 12 months, and liabilities of US$67.0m due beyond 12 months. On the other hand, it had cash of US$134.5m and US$198.8m worth of receivables due within a year. So its liabilities total US$68.5m more than the combination of its cash and short-term receivables.

Since publicly traded Mobvista shares are worth a total of US$927.9m, 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. Despite its noteworthy liabilities, Mobvista boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Mobvista turned things around in the last 12 months, delivering and EBIT of US$9.5m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mobvista 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mobvista 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. During the last year, Mobvista 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.

Summing Up

We could understand if investors are concerned about Mobvista's liabilities, but we can be reassured by the fact it has has net cash of US$15.9m. So we are not troubled with Mobvista's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Mobvista .

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.