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 can see that Mubang High-Tech Co.,Ltd. (SHSE:603398) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mubang High-TechLtd

How Much Debt Does Mubang High-TechLtd Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Mubang High-TechLtd had debt of CN¥289.6m, up from CN¥202.0m in one year. However, because it has a cash reserve of CN¥113.2m, its net debt is less, at about CN¥176.4m.

A Look At Mubang High-TechLtd's Liabilities

The latest balance sheet data shows that Mubang High-TechLtd had liabilities of CN¥2.21b due within a year, and liabilities of CN¥586.0m falling due after that. On the other hand, it had cash of CN¥113.2m and CN¥460.8m worth of receivables due within a year. So it has liabilities totalling CN¥2.22b 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¥6.25b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Mubang High-TechLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Mubang High-TechLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 143%, to CN¥1.2b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Mubang High-TechLtd still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥41m. 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. However, it doesn't help that it burned through CN¥148m 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. For example, we've discovered 1 warning sign for Mubang High-TechLtd that you should be aware of before investing here.

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.