Is MOBI Development (HKG:947) Weighed On By Its Debt Load?

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.' 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for MOBI Development

What Is MOBI Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that MOBI Development had CN¥114.0m of debt in June 2020, down from CN¥182.5m, one year before. However, its balance sheet shows it holds CN¥265.9m in cash, so it actually has CN¥151.9m net cash.

A Look At MOBI Development's Liabilities

We can see from the most recent balance sheet that MOBI Development had liabilities of CN¥791.8m falling due within a year, and liabilities of CN¥17.0m due beyond that. On the other hand, it had cash of CN¥265.9m and CN¥671.0m worth of receivables due within a year. So it actually has CN¥128.1m more liquid assets than total liabilities.

This excess liquidity suggests that MOBI Development is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, MOBI Development boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, MOBI Development made a loss at the EBIT level, and saw its revenue drop to CN¥1.1b, which is a fall of 13%. We would much prefer see growth.

So How Risky Is MOBI Development?

Although MOBI Development had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥25m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with MOBI Development (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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