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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies M.O.B.A. Network AB (publ) (STO:MOBA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for M.O.B.A. Network

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

You can click the graphic below for the historical numbers, but it shows that M.O.B.A. Network had kr17.5m of debt in September 2022, down from kr23.3m, one year before. But it also has kr44.9m in cash to offset that, meaning it has kr27.4m net cash.

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

The latest balance sheet data shows that M.O.B.A. Network had liabilities of kr47.6m due within a year, and liabilities of kr43.0m falling due after that. On the other hand, it had cash of kr44.9m and kr34.8m worth of receivables due within a year. So its liabilities total kr10.9m more than the combination of its cash and short-term receivables.

Of course, M.O.B.A. Network has a market capitalization of kr487.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, M.O.B.A. Network boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, M.O.B.A. Network grew its EBIT by 71% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if M.O.B.A. Network can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, M.O.B.A. Network saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about M.O.B.A. Network's liabilities, but we can be reassured by the fact it has has net cash of kr27.4m. And it impressed us with its EBIT growth of 71% over the last year. So we are not troubled with M.O.B.A. Network's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for M.O.B.A. Network (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.