Is Mobidays (KOSDAQ:363260) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Mobidays Inc. (KOSDAQ:363260) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Mobidays

What Is Mobidays's Net Debt?

As you can see below, at the end of March 2024, Mobidays had ₩17.2b of debt, up from ₩710.7m a year ago. Click the image for more detail. However, it does have ₩23.9b in cash offsetting this, leading to net cash of ₩6.63b.

How Healthy Is Mobidays' Balance Sheet?

We can see from the most recent balance sheet that Mobidays had liabilities of ₩70.8b falling due within a year, and liabilities of ₩1.65b due beyond that. Offsetting these obligations, it had cash of ₩23.9b as well as receivables valued at ₩49.3b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Mobidays' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩64.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Mobidays 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 Mobidays'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, Mobidays reported revenue of ₩27b, which is a gain of 65%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Mobidays?

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 Mobidays lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩1.7b and booked a ₩2.3b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩6.63b. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Mobidays may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 3 warning signs with Mobidays (at least 2 which are significant) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com