Is MOBI Development (HKG:947) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that MOBI Development Co., Ltd. (HKG:947) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, 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.

View our latest analysis for MOBI Development

What Is MOBI Development's Debt?

As you can see below, at the end of December 2020, MOBI Development had CN¥164.6m of debt, up from CN¥98.9m a year ago. Click the image for more detail. But it also has CN¥371.9m in cash to offset that, meaning it has CN¥207.4m net cash.

How Healthy Is MOBI Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MOBI Development had liabilities of CN¥747.2m due within 12 months and liabilities of CN¥75.1m due beyond that. Offsetting these obligations, it had cash of CN¥371.9m as well as receivables valued at CN¥586.1m due within 12 months. So it actually has CN¥135.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that MOBI Development's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that MOBI Development has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is MOBI Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, MOBI Development made a loss at the EBIT level, and saw its revenue drop to CN¥885m, which is a fall of 27%. That makes us nervous, to say the least.

So How Risky Is MOBI Development?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that MOBI Development had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥8.3m and booked a CN¥30m accounting loss. Given it only has net cash of CN¥207.4m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for MOBI Development you should be aware of, and 1 of them is concerning.

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. 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.
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