These 4 Measures Indicate That M.O.B.A. Network (STO:MOBA) Is Using Debt Reasonably Well

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. 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 A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 M.O.B.A. Network had debt of kr21.7m, up from kr8.33m in one year. But it also has kr36.6m in cash to offset that, meaning it has kr14.9m net cash.

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 kr58.9m falling due within a year, and liabilities of kr39.3m due beyond that. Offsetting this, it had kr36.6m in cash and kr38.4m in receivables that were due within 12 months. So its liabilities total kr23.2m more than the combination of its cash and short-term receivables.

Given M.O.B.A. Network has a market capitalization of kr783.5m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, M.O.B.A. Network also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that M.O.B.A. Network has boosted its EBIT by 91%, thus reducing the spectre of future debt repayments. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. M.O.B.A. Network may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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.

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 kr14.9m. And we liked the look of last year's 91% year-on-year EBIT growth. 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. Be aware that M.O.B.A. Network is showing 5 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.