Is Microvast Holdings (NASDAQ:MVST) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Microvast Holdings, Inc. (NASDAQ:MVST) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Microvast Holdings's Debt?

As you can see below, at the end of December 2024, Microvast Holdings had US$311.3m of debt, up from US$185.7m a year ago. Click the image for more detail. However, because it has a cash reserve of US$74.0m, its net debt is less, at about US$237.3m.

A Look At Microvast Holdings' Liabilities

According to the last reported balance sheet, Microvast Holdings had liabilities of US$330.2m due within 12 months, and liabilities of US$233.8m due beyond 12 months. Offsetting this, it had US$74.0m in cash and US$146.0m in receivables that were due within 12 months. So it has liabilities totalling US$344.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Microvast Holdings has a market capitalization of US$579.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off 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 Microvast Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

View our latest analysis for Microvast Holdings

In the last year Microvast Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$380m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Microvast Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$26m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$25m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Be aware that Microvast Holdings is showing 3 warning signs in our investment analysis , and 2 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.