Is Mobvista (HKG:1860) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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 Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mobvista

What Is Mobvista's Debt?

As you can see below, Mobvista had US$75.5m of debt at December 2022, down from US$86.8m a year prior. However, it does have US$137.3m in cash offsetting this, leading to net cash of US$61.7m.

How Strong Is Mobvista's Balance Sheet?

The latest balance sheet data shows that Mobvista had liabilities of US$311.2m due within a year, and liabilities of US$42.8m falling due after that. Offsetting this, it had US$137.3m in cash and US$141.6m in receivables that were due within 12 months. So it has liabilities totalling US$75.1m more than its cash and near-term receivables, combined.

Since publicly traded Mobvista shares are worth a total of US$733.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Mobvista also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mobvista'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.

In the last year Mobvista wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$894m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Mobvista?

While Mobvista lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$15m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Mobvista you should know about.

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.