These 4 Measures Indicate That Mobvista (HKG:1860) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Mobvista Inc. (HKG:1860) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Mobvista

What Is Mobvista's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Mobvista had US$46.6m of debt, an increase on US$30.9m, over one year. However, its balance sheet shows it holds US$117.6m in cash, so it actually has US$71.0m net cash.

How Healthy Is Mobvista's Balance Sheet?

The latest balance sheet data shows that Mobvista had liabilities of US$241.4m due within a year, and liabilities of US$4.59m falling due after that. Offsetting these obligations, it had cash of US$117.6m as well as receivables valued at US$333.5m due within 12 months. So it can boast US$205.1m more liquid assets than total liabilities.

This surplus suggests that Mobvista is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Mobvista boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Mobvista has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 three years, 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

While we empathize with investors who find debt concerning, you should keep in mind that Mobvista has net cash of US$71.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 24% year-on-year EBIT growth. So we don't think Mobvista's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Mobvista insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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