Health Check: How Prudently Does MOBI Development (HKG:947) Use Debt?

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.' 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 MOBI Development Co., Ltd. (HKG:947) does have debt on its balance sheet. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is MOBI Development's Debt?

The image below, which you can click on for greater detail, shows that at June 2025 MOBI Development had debt of CN¥127.5m, up from CN¥100.5m in one year. However, its balance sheet shows it holds CN¥161.5m in cash, so it actually has CN¥34.0m net cash.

How Strong Is MOBI Development's Balance Sheet?

According to the last reported balance sheet, MOBI Development had liabilities of CN¥616.6m due within 12 months, and liabilities of CN¥3.23m due beyond 12 months. Offsetting this, it had CN¥161.5m in cash and CN¥279.5m in receivables that were due within 12 months. So its liabilities total CN¥178.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥101.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, MOBI Development would probably need a major re-capitalization if its creditors were to demand repayment. Given that MOBI Development has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since MOBI Development will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for MOBI Development

Over 12 months, MOBI Development made a loss at the EBIT level, and saw its revenue drop to CN¥480m, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is MOBI Development?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months MOBI Development lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥48m of cash and made a loss of CN¥122m. But the saving grace is the CN¥34.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example MOBI Development has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.