CMGE Technology Group (HKG:302) Is Carrying A Fair Bit Of Debt

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.' 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. We note that CMGE Technology Group Limited (HKG:302) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

We've discovered 1 warning sign about CMGE Technology Group. View them for free.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is CMGE Technology Group's Debt?

The chart below, which you can click on for greater detail, shows that CMGE Technology Group had CN¥512.8m in debt in December 2024; about the same as the year before. However, because it has a cash reserve of CN¥223.0m, its net debt is less, at about CN¥289.8m.

A Look At CMGE Technology Group's Liabilities

Zooming in on the latest balance sheet data, we can see that CMGE Technology Group had liabilities of CN¥1.11b due within 12 months and liabilities of CN¥76.1m due beyond that. Offsetting these obligations, it had cash of CN¥223.0m as well as receivables valued at CN¥857.0m due within 12 months. So its liabilities total CN¥106.1m more than the combination of its cash and short-term receivables.

Given CMGE Technology Group has a market capitalization of CN¥1.25b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 CMGE Technology Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Check out our latest analysis for CMGE Technology Group

In the last year CMGE Technology Group had a loss before interest and tax, and actually shrunk its revenue by 26%, to CN¥1.9b. That makes us nervous, to say the least.

Caveat Emptor

While CMGE Technology Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥449m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥386m of cash over the last year. So in short it's a really risky stock. 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. We've identified 1 warning sign with CMGE Technology Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.