M.O.B.A. Network (STO:MOBA) Has A Somewhat Strained Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, M.O.B.A. Network AB (publ) (STO:MOBA) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

How Much Debt Does M.O.B.A. Network Carry?

The chart below, which you can click on for greater detail, shows that M.O.B.A. Network had kr277.0m in debt in June 2024; about the same as the year before. However, it does have kr36.0m in cash offsetting this, leading to net debt of about kr241.0m.

A Look At M.O.B.A. Network's Liabilities

We can see from the most recent balance sheet that M.O.B.A. Network had liabilities of kr140.8m falling due within a year, and liabilities of kr368.3m due beyond that. On the other hand, it had cash of kr36.0m and kr39.5m worth of receivables due within a year. So it has liabilities totalling kr433.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the kr192.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, M.O.B.A. Network would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While M.O.B.A. Network's debt to EBITDA ratio (2.5) suggests that it uses some debt, its interest cover is very weak, at 2.0, suggesting high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Notably, M.O.B.A. Network's EBIT launched higher than Elon Musk, gaining a whopping 469% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since M.O.B.A. Network 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, M.O.B.A. Network burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, M.O.B.A. Network's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at growing its EBIT; that's encouraging. Overall, it seems to us that M.O.B.A. Network's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example M.O.B.A. Network has 4 warning signs (and 1 which doesn't sit too well with us) we think 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.

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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.