Is CMGE Technology Group (HKG:302) Using Too Much Debt?

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.' 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 CMGE Technology Group Limited (HKG:302) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CMGE Technology Group

What Is CMGE Technology Group's Debt?

You can click the graphic below for the historical numbers, but it shows that CMGE Technology Group had CN¥444.2m of debt in December 2022, down from CN¥764.6m, one year before. But it also has CN¥452.6m in cash to offset that, meaning it has CN¥8.47m net cash.

A Look At CMGE Technology Group's Liabilities

According to the last reported balance sheet, CMGE Technology Group had liabilities of CN¥1.36b due within 12 months, and liabilities of CN¥102.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥452.6m as well as receivables valued at CN¥1.08b due within 12 months. So it actually has CN¥73.9m more liquid assets than total liabilities.

This state of affairs indicates that CMGE Technology Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥6.38b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that CMGE Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, CMGE Technology Group's EBIT fell a jaw-dropping 99% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CMGE Technology Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CMGE Technology Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, CMGE Technology Group 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 it is always sensible to investigate a company's debt, in this case CMGE Technology Group has CN¥8.47m in net cash and a decent-looking balance sheet. Despite its cash we think that CMGE Technology Group seems to struggle to grow its EBIT, so we are wary of the stock. Given our hesitation about the stock, it would be good to know if CMGE Technology Group insiders have sold any shares recently. You click here to find out if insiders have sold recently.

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.