David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Mubang High-Tech Co.,Ltd. (SHSE:603398) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Mubang High-TechLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Mubang High-TechLtd had CN¥556.4m of debt, an increase on CN¥319.4m, over one year. On the flip side, it has CN¥168.5m in cash leading to net debt of about CN¥387.9m.
How Strong Is Mubang High-TechLtd's Balance Sheet?
We can see from the most recent balance sheet that Mubang High-TechLtd had liabilities of CN¥2.46b falling due within a year, and liabilities of CN¥763.2m due beyond that. Offsetting this, it had CN¥168.5m in cash and CN¥609.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.44b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Mubang High-TechLtd has a market capitalization of CN¥5.36b, 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. 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 Mubang High-TechLtd 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.
In the last year Mubang High-TechLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to CN¥1.2b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Mubang High-TechLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥25m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥160m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Mubang High-TechLtd is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...
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.
