Here's Why M.O.B.A. Network (STO:MOBA) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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. As with many other companies M.O.B.A. Network AB (publ) (STO:MOBA) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for M.O.B.A. Network

What Is M.O.B.A. Network's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 M.O.B.A. Network had debt of kr25.0m, up from kr11.4m in one year. However, its balance sheet shows it holds kr92.5m in cash, so it actually has kr67.5m net cash.

How Strong Is M.O.B.A. Network's Balance Sheet?

We can see from the most recent balance sheet that M.O.B.A. Network had liabilities of kr57.3m falling due within a year, and liabilities of kr31.4m due beyond that. On the other hand, it had cash of kr92.5m and kr8.55m worth of receivables due within a year. So it actually has kr12.3m more liquid assets than total liabilities.

This state of affairs indicates that M.O.B.A. Network's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the kr747.7m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that M.O.B.A. Network has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, M.O.B.A. Network saw its EBIT drop by 6.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is M.O.B.A. Network's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While M.O.B.A. Network 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. In the last three years, M.O.B.A. Network created free cash flow amounting to 15% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that M.O.B.A. Network has net cash of kr67.5m, as well as more liquid assets than liabilities. So we don't have any problem with M.O.B.A. Network's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for M.O.B.A. Network you should know about.

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.

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.

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