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.' 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. We note that Montnets Cloud Technology Group Co., Ltd. (SZSE:002123) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Montnets Cloud Technology Group Carry?

You can click the graphic below for the historical numbers, but it shows that Montnets Cloud Technology Group had CN¥1.52b of debt in September 2024, down from CN¥1.69b, one year before. On the flip side, it has CN¥1.26b in cash leading to net debt of about CN¥260.6m.

How Strong Is Montnets Cloud Technology Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Montnets Cloud Technology Group had liabilities of CN¥2.17b due within 12 months and liabilities of CN¥198.8m due beyond that. On the other hand, it had cash of CN¥1.26b and CN¥1.54b worth of receivables due within a year. So it actually has CN¥430.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Montnets Cloud Technology Group could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Montnets Cloud Technology Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Montnets Cloud Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 4.1%, to CN¥5.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Montnets Cloud Technology Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥99m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Montnets Cloud Technology Group's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.